Woolworths’ sales revival remains elusive for the new look management team led by Brad Banducci. So much so that he has revealed that good old standby of the new CEOs – a company-wide strategic review.
But the CEO made it clear shareholders will have to wait at least three years for any real improvement.
Woolies yesterday told the ASX in its third quarter sales report that food and liquor sales at its Australian supermarkets (the company’s heartland) hit $10.7 billion.
While that was a rise 0.4% on a top line basis, after stripping out the impact of the earlier Easter, food and liquor sales actually fell 0.9%, on a same store basis, a terrible result.
Overall group sales fell 0.7% to $14.4 billion, mostly because of the slide in petrol prices hit sales (down 8.7%) at its supermarkets chain.
As a result, it left Woolies trailing arch rival Coles for the 27th consecutive quarter (almost 7 years).
Coles reported a 4.9% rise in same store sales in the third quarter sales – that is a considerable gap on Woolies.
Woolworths shares fell well over 2% in early trading.
However, the surprise interest rate cut by the RBA and subsequent stockmarket surge came to the aid of Woolies and trimmed the loss to around 0.09% as the shares closed at $22.27.
Woolies’ biggest continuing headache seems to be the Big W discount chain which had yet another weak quarter – sales fell 4.6% to $865 million, while its hotel division saw sales climb 2.5% to $368 million, while its New Zealand supermarkets revenue rose 3.8% to $NZ1.6 billion ($A1.47 billion).
“Following poor summer trading, we currently expect a small loss in General Merchandise in FY16 as we aggressively clear unproductive summer and current season winter stock,” Woolworths said in yesterday’s statement.
Woolworths’ food and liquor performance was impacted by a 2.4% slide in prices as the price war intensified in the supermarkets sector. But Wesfarmers, which own Coles, also pointed out that its supermarkets were hit by significant price deflation (for that blame the 11% slide in fruit prices in the quarter).
“Good progress has been made on delivering better prices and improved service to our customers,”Mr Banducci said in yesterday’s statement to the ASX.
“The sales performance in Australian Supermarkets continues to be impacted by high levels of deflation, predominantly from our price investment. However, we are encouraged that customers are starting to notice the improvements we are making,” the CEO said.
“It will be a three to five year journey to rebuild Woolworths supermarkets, but we are confident we are on the right track.” Home Improvement sales for the quarter were $507 million, an increase of 11.4%.
The company expects to invest a further $150 million, mostly in price, customer service and loyalty, in the second half of the year. Woolworths expects to post a small loss in 2016 in general merchandise.
With the review underway, Woolies said, “It is too early to quantify the financial impact and we will provide an update at or before our full year 2016 results”.
In other words, shareholders can expect more red ink to go with the first half losses caused by the write-downs at the troubled Masters hardware division.
Mr Banducci also unveiled a new business structure which further separates Woolworths’ food and non-food operations, warned of heavier investment in grocery prices and said there would be more losses at BIG W after the disappointing sales in the quarter.
Mr Banducci also indicated that Woolworths, like arch rival Wesfarmers, would take a more “objective” approach to its non-food businesses, setting the stage for possible demergers and asset sales down the track.
Woolworths is also reviewing plans for new stores, tweaking its weak, six-month-old customer loyalty program, looking for more cost savings to relieve pressure on profit margins.
Woolies has already let it be known the liquor business is being reviewed (despite it being the most successful of its kind in the country and outpointing Coles’ weak offerings).
The future of the company’s involvement in hotels and poker machines is likely to be on the list, but the central question is what to do with the sliding performance of Big W.
As well, the long term holding of Woolies NZ operations is likely to be examined, with some analysts wondering whether a trade sale or IPO might be a better way to go to reduce complexity.
In February, Woolworths revealed a $972 million first half loss, its first for more than 20 years, driven by the massive $1.9 billion write down in the value of the Masters hardware chain. And that remains the central challenge for the board (the CEO is not involved in this process).
The fate of the hardware business remains unknown, and the attitude of its US partner Lowes Cos which is known to be unhappy about the loss. Lowes reports its third quarter figures shortly and could reveal more details on its attitude then.
Woolies said that in Home Improvement sales for the quarter were $507 million, an increase of 11.4% on the previous year or 11.9% adjusted for Easter.
Masters sales for the quarter were $282 million, up 30% on the previous year or 28.8% Easter-adjusted. Home Timber and Hardware sales for the quarter were $225 million, down 5.5% on the previous year or -3.8% Easter adjusted.
