Woolworths maintains momentum, private label expansion to continue

Posted by Daniel Palmer on 27th February 2009

Woolworths, Australia’s largest supermarket operator, has recorded an 8.8% spike in first-half sales to $26.1 billion as their food and liquor division drives growth.

“Today we are pleased to report a net profit increase of 10.3% to $983.3 million for the half-year ended 4 January 2009. This is a strong result reflecting increasing customer acceptance of our retail offer underpinned by the continued investment in all our businesses,” Woolworths CEO Michael Luscombe said. “I am confident that we are well positioned to take advantage of growth opportunities as they arise and to meet future challenges.”

“Woolworths has invested almost $1 billion of capital in this half year to add new stores, improve existing stores, add services, deliver value and create an even better shopping experience for our customers. We created 9,000 jobs in the half year and expect to create another 7,000 jobs in the second half.”

The supermarket, liquor and department store operator said they had exceeded their targets for the first-half despite a relatively soft result in New Zealand.

For the half-year, Australian Supermarket division sales increased 9.9%, of which Food and Liquor sales in Australia grew 9.0%. EBIT grew faster than sales, increasing by 16.1%. The Australian Supermarket division’s EBIT margin increased from 5.74% last half year to 6.06% this half year, an increase of 32bps.Inflation levels were higher than last year at 4.1% (HY08: 2.0%), the company noted.

Mother shopping with child

Success of their supermarket division in Australia was put down to a number of factors including the positive response to their new format 2010c stores, price rollback campaigns and the success of Woolworths private label. The growth in sales of private label products exceeded overall grocery performance.

“Our focus on product quality and value in high loyalty segments has delivered strong results,” the company claimed in reference to private label. “A greater focus by customers on value during tighter economic conditions has assisted our private label growth.”

Upon noting that, “private label penetration (is) well below international levels”, Woolworths indicated that expansion of their range would continue – with Homebrand, Select, Freefrom, Naytura and Organics ranges reportedly gaining strong customer acceptance.

During the half year, 15 new supermarkets were opened, edging them closer to 800 nationwide. A further 11 stores are planned to be opened in the second half of the year.

They have now completed a substantial portion of the end-to-end supply chain program in Australian Supermarkets, while their new IT platform (including AutoStockR and Stocksmart) continues to “perform exceptionally well”. Woolworths reported that their new platform provides an enhanced ability to plan and manage volumes across the distribution and store network, providing lower costs and improved in-stock positions.

Inventory levels have consequently been better managed, with the December inventory balance increasing by 8.0% (vs Dec 2007) – which compares favourably to the first half sales increase of 8.8%. When excluding the impact of incremental imported inventory and the incremental liquor inventory associated with our new liquor DCs, the reduction in average inventory across the group was 0.7 days (0.1 days including these), nearing their target of cutting inventory holdings by 1 day per year.

Their liquor division – which includes Dan Murphy’s and BWS – performed “very well with strong growth in both sales and profits”, with their foray into private label beer considered a success.

“We continue to expand our range of exclusive brands and control labels,” they reported. “In July 2008 we launched our own low-carb beer called “Platinum Blonde”, which has performed very well.”

Trading overall, in the third quarter has continued along similar trends to that experienced in the first half, the supermarket giant noted, believing their businesses to be “flexible” enough to deal with a further deterioration in the economic environment.

Despite being cautious about future trading conditions, Woolworths is bullish about the coming six months. “We are mindful that discretionary spending continues to be influenced by macro-economic factors and by recent events in global financial markets. Factors such as inflation, fluctuating petrol prices, interest rates (including the non-cash impact on certain discounted balance sheet provisions), rising unemployment and consumer confidence levels are very difficult to predict in the current environment,” they explained. “Subject to the uncertainty regarding these factors we expect sales from continuing operations to grow in the upper single digits (and) we expect that EBIT will continue to grow faster than sales in FY09.”