Woolworths has made a mockery of all those brokers who had urged investors to rotate out of defensive stocks like retailers and into more growth-orientated issues to catch the current rebound.
The six week rally in markets, which have driven the bourses up around 25% from the March 9 lows, has seen more and more strategists urge investors to move to stocks that can catch the rebound in the wider economy better than so called defensive shares like retailers.
Technology, resources and banks are being suggested as better buys than retailers like Woolies.
On to of that, Banc of America/Merrill Lynch retail analyst, David Errington and some other analysts are concerned Woolies might be over-investing in Australia and New Zealand as it fights off a rebuilding Coles and independents like IGA and Aldi.
In New Zealand the group wants to grow, but is constrained by competition rulings and by the small size of the market.
Mr Errington and some shareholders would like to see excess capital returns to shareholders instead of being spent on expansion
That’s why this comment on the third quarter from CEO Michael Luscombe, won’t go down all that well:
“We are pleased to report another strong overall sales result. Woolworths continues to reinvest in all its businesses to improve our stores, create jobs, add services, deliver value, and create an even better experience for our customers.
"This result reflects the continued positive response from our customers to these reinvestment strategies” he said in a statement.
That phrase "continue to re-invest” will spark some attention from analysts.
That aside, those analysts who have been recommending a switch from the consumer staples sector to sectors that might be better placed for a recovery, such as banks and resources groups, were left with a bit of egg on their faces at the Woolies figures.
They confirm that Australian consumers are hunkering down, spending more on food than elsewhere in the sector, and spending more time eating at home than in cafes, restaurants etc.
With Australia’s slowdown running behind those in New Zealand, Asia, Europe and the US, it is quite likely that investors will have to wait a while in a defensive mode while the downturn here plays out.
Woolies third quarter sales figures confirmed its utter dominance of the Australian retailing sector.
In fact, only the reservations were about plans to spend heavily on revamping existing stores (as laid out by Merrill Lynch retail analyst, David Errington). He praised the figures on a conference call Friday.
Australia’s biggest retailer, said third-quarter adjusted food and liquor same-store sales rose 8.8%, a very solid result in the group’s operating heart, its Australian supermarkets.
That was the standout effort in the 6.5% rise in seasonally adjusted third-quarter sales to more than $12.3 billion.
Woolworths, which accounts for about 35% of Australia’s food and liquor sales, said sales rose more than $700 million in the quarter, compared to the third quarter of last year when conditions in the wider economy were far more confident.
Woolies’ shares jumped by 5% in early trading, but came back in the slowdown in late trading Friday to end up just 30c at $25.88. They had peaked at $26.70 in the enthusiasm in the wake of the sales announcement.
The company forecast that sales for the rest of the year from continuing operations will continue to grow at an upper single-digit pace.
Woolworths said petrol sales fell with the slump in prices. That depressed the overall sales rise to 5.9%. But excluding petrol, sales rose 9%, seasonally adjusted, on a topline basis.
Australian food and liquor sales for the quarter rose 10% to $8.4 billion, the company said and comparable store sales in food and Liquor strengthened with a rise of 8.8% compared with a 7.1% rise in the second quarter (which included Christmas, the peak period).
Woolies said inflation for the quarter was approximately 4.4%, down from the 4.8% experienced in the second quarter. That made the rise in headline and same store sales look much better: it seems volumes and prices both drove the sales rise.
Sales at the general merchandiser Big W rose 9%, with growth across most categories. Same store sales edged up to 6.7% in the quarter compared with 6.4% in the second quarter.
The company’s Dick Smith and Tandy electronics stores saw sales growth of 10.6%, hotels 1.5% and the recessed New Zealand economy saw sales up by around 3% in a tight market.
