For the past three years Woolworths (WOW) biggest headache was the expansion into hardware through Masters, but as that was being resolved, its Big W department store chain developed a crack which turned into a flood of problems in the past 18 months, and will damage 2016-17 earnings.
"BIG W is a work in progress and its turnaround will be a multi-year journey. Due to the investment we are undertaking as part of our revised plan, we currently expect BIG W to report a loss before interest and tax of between $115 and $135 million for in the second half of 2017,” Woolies CEO, Brad Banducci said in yesterday’s third quarter update to the ASX.
Big W was barely profitable in the December half year with earnings falling nearly 90% in the first six months of the 2016-17 financial year. After impairments it lost $27 million. Now it is heading for losses of more than $100 million in the June half year.
That was after losing $14.9 million on an earnings before interest and tax basis (EBIT) in 2015-16 after reporting ebit of $11.7 million the year before.
Big W is struggling with topline sales down 8.6%, or 6.1 per cent when adjusted for Easter, at $757 million for the quarter. But Big W’s comparable sales fell 8.2%, (or 5.7%, adjusted for Easter), hurt by apparel clearances to offload summer inventory to make way for new season items.
Womenswear sales remained weak while homewares’s sales performed well on the back of new product designs. David Walker has been appointed BIG W’s managing director after acting in the role since November following the sudden resignation of Sally Macdonald.
For Woolies Big W’s red ink will add to further strains on earnings for the full year from higher costs for labour, fruit and vegetables, despite recording its strongest quarterly sales growth in years in the three months to March.
Mr Banducci said Woolworths was “still in the very early stages” of its turnaround but the supermarket growth has been a “particular highlight” in recent quarters
Woolworths has invested more than $1 billion on cutting prices and improving its stores. Coles has also invested record amounts in cutting prices in recent quarters, but has been left behind.
But Mr Banducci flagged rising costs in the second half as Woolworths cuts prices at its supermarkets, as well as deeper woes at Big W.
“ … the second half of 2017 will reflect the financial impact of higher investment in key areas, cost price increases (particularly in meat and produce) and our response to ongoing competition and promotional intensity,” he warned yesterday. In other words, earnings will be weak.
The country’s biggest supermarket chain said Australian sales grew 5.1% in the third quarter to $9.28 billion, or 5.6% adjusting for the timing of Easter.
Including Easter, like-for-like sales (which excluding new stores) grew by 4.5%
The like-for-like sales growth beat the 0.8% Easter-adjusted quarterly growth recently from Coles last week. Woolworths’ average food prices declined by 2.5% during the quarter; similar to the second quarter’s 2.6% price fall and slightly less than the 2016 third quarter’s 2.7% drop.
The retailer said it would continue to focus on sustainable sales momentum throughout the rest of 2017 and into the 2018 financial year.
The group’s liquor sales, including Dan Murphy’s and BWS liquor stores, increased 2.3% to $1.9 billion with comparable sales up 0.8%.
Woolies said the very hot weather in January and early February helped boost trade but wet weather, particularly in NSW, resulted in weaker-than-expected sales in March. Woolies shares rose 2.1% yesterday to $27.35.
