Australian supermarket giant Woolworths has announced a drop in Net Profit After Tax of 3.1 per cent, to $1,280.4 million, for the half year ended 4 January 2015.

Woolworths reported sales of $32.4 billion, up 1.8 per cent, or 3.4 per cent excluding Petrol, and Earnings Before Interest and Tax of $2,129.2 million, up 4.7 per cent.

Woolworths Limited Chief Executive Officer Grant O’Brien said sales momentum in October 2014 and November 2014 “showed improvement, however trading in December was subdued and this trend continued into January”.

Mr O’Brien announced a profit forecast downgrade for the full 2015 financial year, as a result of planned investments to deliver on long term plans.

“At present the range of analyst net profit after tax growth forecasts for FY15 is 1.8-6.6 per cent,” Mr O’Brien said. “Factoring in the investment initiatives now planned, our current expectations are that growth in FY15 net profit after tax before significant items will be towards the lower end of this range,” he said.

“Cost savings have enabled us to continue to invest in lower prices. In Australian Supermarkets, customers benefited from lower average prices as reflected by deflation of 1.8 per cent for the half year,” Mr O’Brien said. “Liquor continues to perform well and is the clear market leader across its formats on price, offer, convenience and innovation,” he said.

Hardware pressure on profits

Some commentators have suggested the downgrade might reflect Woolworths struggling to resurrect sales in its food and grocery business, while trying to deal with losses in its hardware business Masters, reversing declining earnings at Big W and its portfolio of hotels. As far back as 2011, analysts expressed concerns about Woolworths moving into hardware.

Australian Food News reported in August 2014 that Woolworths was looking for new strategies to overcome a poor performance by its Masters home improvements division. Woolworths has been battling the strong market dominance of the Wesfarmers-owned Bunnings group. Wesfarmers also owns major supermarket rival Coles.

Leadership changes to supermarkets business

Woolworths also announced a new leadership team and structure in its Supermarkets business, following the resignation of Tjeerd Jegen.

The new leadership team will operate under Brad Banducci as Managing Director of the supermarket group’s Australian Food and Liquor business. Dave Chambers has been appointed to Director, Woolworths Supermarkets, reporting to Mr Banducci. Mr Banducci will maintain leadership of the Woolworths Liquor Group until a new appointment has been made.

Petrol business

Mr O’Brien said Woolworths had continued to focus its efforts on its operated petrol sites and “deliver further improvements to our convenience offer” after changes to the supermarket group’s agreement with Caltex.

Australian Food News reported in December 2014 that Woolworths and Caltex

At the end of financial year 2014, the Caltex-Woolworths fuel network comprised 633 sites, including 131 Caltex-operated sites with the remainder operated by Woolworths. Under the revised arrangements, 92 of the Caltex-operated sites will be rebranded as ‘Star Mart’ or ‘Star Shop’ convenience stores while continuing to offer the Woolworths fuel discount redemption.

General Merchandise

Woolworths reported that its General Merchandise business continued to be impacted by its ongoing BIG W business transformation.

“A key part of this transformation is to accelerate the alignment of our inventory to our customer strategy,” Mr O’Brien said. “A provision of $148.2 million ($103.7 million after tax) has been raised primarily to facilitate this,” he said.

Home Improvement

Mr O’Brien said the Home Improvement business continued to deliver against the plan announced in August 2014, focused on a new store format, range improvements and a revised store roll out plan.

“December store openings in Adelaide and Brisbane featuring elements of the new format are delivering encouraging early results,” Mr O’Brien said.

Hotel business

Woolworths reported that its Hotel business earnings were impacted by the additional Victorian gaming tax which came into effect in May 2014 as well as the divestment of a portfolio of freehold Hotel sites in October. Excluding these, Woolworths said earnings before interest and tax was in line with the prior year.

Online sales

Mr O’Brien said online sales increased more than 20 per cent on the previous half year and were $1.4 billion in calendar 2014.

“We continue to lead the market in innovation, having launched ‘Dan Murphy’s Connections’ and the ‘Simply Collect’ partnership with eBay,” Mr O’Brien said.

New Zealand supermarkets

Woolworths reported that its Countdown Supermarkets business continued to deliver profit growth despite price deflation and ongoing subdued grocery market conditions in New Zealand.

Outlook

“During the half we accelerated cost reduction initiatives and are driving greater efficiency through the early stages of Mercury 2,” Mr O’Brien said. “Implementing further cost reduction initiatives across the business will be a key focus for the second half of FY15 and beyond,” he said.

“A strategic review of Australian Supermarkets performance confirmed the considerable opportunities for performance improvement, future growth and the need for continued disciplined investment in value for customers to maintain our market leadership and drive sales momentum,” Mr O’Brien said.

“The investment in Australian Supermarkets will span all aspects of the customer offer and will be funded in part by a pipeline of cost savings in excess of $500 million, which we are currently building,” Mr O’Brien said.

Further details of Woolworths’ plans will be announced at its Investor Strategy Day, which is scheduled for 6 May 2015 in Sydney.