Buried in the third quarter sales figures for Woolworths was an explosive bit of information.
Food price inflation more than doubled in the quarter. No wonder the Reserve Bank is on the phone more often to retailers asking ‘how things are going’.
Woolies said that third-quarter sales rose 10.2% in the quarter, or 9.8% adjusted for the earliest Easter in 95 years.
That was spot on consensus from the market analysts: the shares hit a high of $29.20 in the opening enthusiasm of trading and the solid headline figures for the quarter, before easing as the figures were assessed.
The shares then hit a low of $28.35, before recovering to close steady on $28.70, which was effectively a fall in a market that rose 1%.
But it was the remark in discussing the figures for the Australian supermarkets and liquor businesses that caught the eye.
"Inflation for the quarter was approximately 4.5%, an increase from the 2.0% experienced in the first half as we continue to see increased price pressure on certain products and the ceasing of price deflation in produce."
That raised questions about just how solid the sales growth figures in supermarkets and liquor had been. Food price inflation is now above the levels of the June half of 2007.
"Australian Food and Liquor sales for the quarter were $7.6 billion, representing an increase of 9.3% (8.6% Easter adjusted). Comparable store sales in Food and Liquor for the third quarter increased by 7.3% (6.7% Easter adjusted, Q2: 6.0%), as we cycle a similarly strong comparable sales growth in the prior year of 6.6%," Woolies said.
If food price inflation was running at 4.5% in the quarter, that might indicate real growth was considerably less in the quarter in the most important part of the Woolies chain. It is the major profit and cashflow generator. Taking food price impact off the same store sales growth figure (adjusted for Easter) of 6.7% got some analysts worried about possible margin compression.
They said that while second quarter same store sales grew at 6%, and this improved to 6.7%, but food price inflation more than doubled from the second quarter to 4.5% in the March three months, which could be a problem.
But there was no hint of that in the comments from the company.
“The strong momentum in the business has continued in the third quarter with further gains in market share. Our accelerated refurbishment program is progressing well with improvements in both sales and gross margin in the stores that we have completed.” said Naum Onikul, Woolies’ Director of Supermarkets.
Woolworths reiterated its forecast for annual sales to rise between 8% and 10%. There was no change to the February profit forecast of a rise of up to 23% because the retailer doesn’t make profit forecasts with quarterly sales announcements: only at interim and full year statements.
Woolies shares are down 15% this year compared with a 14% decline in the ASX 200 index.
Fuel sales rose 20% to $1.4 billion in the quarter as world oil prices soared to record levels; but these high prices saw sales volumes fall.
"Petrol sales for the third quarter, including Woolworths/Caltex Alliance sites, increased by 19.7% (21.2% Easter adjusted) reflecting higher petrol prices. Petrol comparable sales (dollars) increased 15.7% (17.1% Easter adjusted) during the quarter. Comparable volumes declined 2.3% (1.0% decline Easter adjusted, Q2 1.3% decrease) reflecting lower demand due to higher petrol prices."
As you can see the comparable sales volumes fell in the third quarter from the second quarter as prices rose: not even the 4c a litre off shopper-dockets and special offers can make people maintain petrol purchases at former levels in times of rapidly rising prices.
New Zealand supermarket sales rose 4.2% to $1.1 billion in the quarter and revenues at the Big W discount chain rose 13% (10.4% adjusted for Easter) to $879 million in the quarter. Comparable sales in the third quarter rose 6.2% (3.8% Easter adjusted, Q2: 3.6%).
Sales at the hotels unit rose 4.4% to $263 million, compared with 14% growth a year earlier, as smoking bans in a number of states (South Australia, Victoria and NSW in particular) continue to affect customer visits, purchases and gaming machine revenues.
The company said: "Hotel sales in the third quarter increased by 4.4% (5.2% Easter adjusted) to $263 million. Overall comparable sales increased by 0.2% (1.0% Easter adjusted) in the quarter which was a modest performance, reflecting the impact of smoking bans resulting in more modest gaming comparable sales for the quarter (Q3: 0.9%, Q2: 3.1%)."
The consumer electronics unit, which includes the Dick Smith and Powerhouse brands, increased sales 14% to $356 million on demand for flat-panel televisions.
"Total Consumer Electronics sales grew by 13.7% (16.7% Easter adjusted) during the third quarter. Consumer Electronics (in Australia and New Zealand) has continued to enjoy solid growth, with third quarter sales increasing 8.2% (11.1% Easter adjusted). Comparable store sales for the third quarter increased by 3.3% normalised for movements in exchange rates (2.8% unadjusted). (5.0% Easter adjusted normalised for movements in exchange rates, Q2: 5.3%) During the quarter we opened four new stores taking total stores to 416.
"Consumer Electronics in India, our venture with TATA now services 17 retail stores operating under the Croma brand achieved sales of $26 million for the quarter."
It was still a solid result, but question marks were raised around the sales and profits in supermarkets with the sharp rise in food price inflation, while the hotels division is not performing as well as it did a year ago.
