The enormity of the gulf between Woolworths and Coles was driven home yesterday when Woolies produced net earnings for the first half of 2007 that went within $100 million of matching the amount Coles expects to make in a full year.
In its still amazing market statement on Friday revealing lower sales and profits in supermarkets and Kmart and a restarting of the sales process, Coles and CEO, John Fletcher and chairman, Rick Allert said that earnings in 2007 would be around the $787 million forecast last year, but 10 per cent lower next year when they were supposed to get close to a billion dollars.
Woolies revealed yesterday that it’s after tax profit for the first half of 2007 jumped 28 per cent to more than $695 million. Not too shabby and it was only a couple of years ago when Coles earned that in a full year.
Woolies shares climbed to a day’s high of $26.93 but settled back around $26.74, a new all time high for the retailer and a rise of 54c on the day.
Coles shares finished at $15.62 and the only thing keeping them afloat is the prospect of a sale or break up.
There is no other reason for Coles shares to trade at such high levels, especially after comparing the financial and sales performance of it and Woolies.
Woolies lifted its interim dividend 25 per cent to35c a share from 28c, more than forecast by analysts many of whom were around the 32c a share mark.
Woolies said it expects the year’s earnings to be higher than previously forecast.
Woolworths said it now expects net earnings to grow 20 to 24 per cent for the 2006/07 year, an increase from the previous guidance of 16 to 21 per cent growth.
It kept guidance for overall group sales growth of eight to 12 per cent for the year, while also saying that it expected earnings before interest and tax (EBIT) to continue to grow faster than sales in 2006/07.
Woolworths reported a 24.3 per cent rise in net profit to $1.01 billion for 2005-06, as sales rose 20.4 per cent to $37.73 billion and $37.6 billion from continuing operations.
If the WOW’s guidance is maintained the company’s net profit will nudge $1.3 billion or around$500 million more than Coles, while sales could top $41 billion.
An interesting snippet is the sharp rise in profits from the petrol business (helped by the higher prices no doubt and a bit of leading and lagging of price cuts): EBIT from petrol jumped to $41.9 million from $22.4 million.
A sign of just how effective a retailer the company is that the overall group EBIT margin topped 5c in every dollar, with the EBIT margin in its Australian supermarkets, its heartland, reaching 5.03c in every dollar of sales, up from 4.36 a year ago.
Coles earns around 4c in every dollar margin at the EBIT level.
Unless Woolies management has a brain snap, Coles or its new owners will be playing catch up for years to come, even if a retailer buys the Melbourne group.
Woolworths CEO Michael Luscombe said the company had reported a strong first half result and continued to build on a solid platform. “We continue increasing our focus on our customers and consistently executing our strategy to pursue sustainable, profitable growth,” he said.
“Further, our strategy continues to be successful in our core business; leveraging our strategic supply chain advantages across the Woolworths businesses; integrating and harvesting the planned synergies in the Progressive business in New Zealand; and continuing to lay foundations for further sustainable, profitable growth.”
But he would not talk about Coles’ problems or whether WOW would be a player in any deal. All he would say is that Woolies would be an ‘interested spectator”.
“We’re an interested spectator and, after that, no comment,” Mr Luscombe said after the release of the first half results.
Woolies group EBIT rose by 27 per cent to $1.14 billion for the half year ended December 31, 2006 and the company said that group EBIT was now growing faster than sales, a sign the company’s revamp of its logistics and in store supply and ordering business was now producing much greater gains than previously estimated.
The EBIT from the Australian supermarkets business, its profit driver, rose 31 per cent to $878.8 million. That includes liquor and petrol.
Earnings from Woolworths’ New Zealand supermarket more than doubled to $69.3 million.
Earnings from Big W discount stores rose 3 per cent in the half to $107.6 million. It had a difficult half, battered by high petrol prices and then given something of a second life by the sharp retreat in prices late last year.
But the hotels business (Australia’s biggest pub owner), did better than Big W with earnings of $109.5 million.
The consumer electronics unit, which includes the Dick Smith and Powerhouse brands, increased earnings 4.6 percent to $38.6 million.
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And US reports say that Wal-Mart, the world’s biggest retailer and mentioned as a possible buyer of Coles, has agreed to buy 35 per cent of a hypermarket operator in China.
The investment is in Trust-Mart, which operates 101 large style hypermarket formats. Wal-Mart didn’t release any details on price or sales.
Any eventual purchase of Trust-Mart would more than double Wal-Mart’s stores in China.
This sort of move would be easier than buying a basket case like Coles in a low growth market like Australia with such a dominant market leader like Woolies.
