Has the love affair with Woolworths (WOW) and investors been rekindled after the unfortunate dalliance with hardware? Yesterday’s market reaction to the December half year result suggests investors are prepared to overlook a few short term blemishes at the country’s biggest retailer.
Woolworths’ same-store supermarket sales rose at the fastest pace in more than two years in the six months to December, but its $1 billion investment into prices and service has come at a cost to shareholders, who have foregone more than $120 million in dividends.
As well there was another rotten result from the Big W department store chain and that is now looking like a candidate for sale or drastic surgery.
Woolworths slashed its interim dividend by 10 cents a share to 34 cents – the lowest interim distribution since 2006 – after net profits from continuing operations fell 16.7% to $785.7 million in the December-half.
Woolworths defended the decision to cut its interim dividend by a higher than expected 22%, saying it reflected the reduction in group profits – including losses from the now defunct Masters – and its 60% first-half payout ratio.
But it means shareholders are again paying for the confusion and incompetence seen in the Masters disaster and its multi-billion dollar clean up bill.
The interim was down 22.7%, so Woolies is clearly clinging on to as much cash as possible without putting the screws on shareholders after the cuts in 2015-16 as the company cleaned up the $s billion plus mess that was the Masters hardware adventure. Despite all this, Woolies shares jumped 4.4% to $26.63.
Group earnings before interest and tax slumped 14.5% to $1.3 billion – falling short of market forecasts around the $1.39 billionmark – dragged down by a 14% drop in earnings from the group’s core business – its Australian supermarkets to $811.6 million. Australian food sales rose 2.8% but the margins crunch battered the bottom line in the half year.
Woolworths is estimated to have invested $300 million into reducing grocery prices and boosting service in supermarkets in the December-half to regain market share from Coles, Aldi and Metcash’s IGA stores, taking its cumulative investment over the last 18 months to $1 billion. That investment has reversed an 18-month slide in same-store supermarket sales, but shareholders are paying for it.
Like-for-like sales rose 0.7% in the September quarter and a more convincing 3.1% in the December quarter – the highest since July 2014. That made a toal for the half year of 1.9%, and well ahead of the weak 1% same-store sales growth at Coles .
However, margins crashed to the lowest level since 2004 and dividends were cut after being reduced in 2016.
Woolworths chief executive Brad Banducci said the trend in the second quarter had continued into the March quarter.
"This momentum gives us confidence that, while we still have a lot to do, we are on the right track," Mr Banducci said as Woolworths shares rose 1.4 per cent to $25.85.
Woolworths has ploughed more than $1 billion to turn around its fortunes in the past year, and chief Brad Banducci said the momentum of the turnaround gave the business confidence it was "on the right track".
Woolworths now treats its 527 petrol stations and convenience stores as discontinued operations after reaching agreement before Christmas to sell the business to BP for $1.78 billion, conditional on regulatory approvals, which are expected to take until January 2018. Petrol earnings rose 26 to $74.1 million.
This deal could be reshaped by the competition regulator with Caltex, the current parter being allowed to buy some of the stations where there is an overlap with existing BP stations (as there are in Sydney in particular.
Woolworths is also now separately reporting earnings from Endeavour Drinks, formerly known as Woolworths Liquor Group. Earnings Before Interest and Tax rose 3.1% to $302.3 million as higher staff bonuses crimped margins. Sales rose 4% to $4.3 billion, with comparable sales up 2.4%.
BIG W though again reported a poor result.
It has lost two managing directors in three years, and that lack of leadership no doubt played a major role in the $100 million collapse in earnings. The business lost $27.2 million in the first half compared with a profit of $72.9 million in the previous period.
Sales slid 6.3% to $2.05 billion and Big W is doing its best to emulate the poorly performing Target chain at Wesfarmers.
The BIG W result included charges of $35.3 million including $21.1 million in impairments of store property, plant and equipment and $14.2 million relating to provisions for onerous leases.
Mr Banducci said a review of the BIG W strategic plan was underway and was expected to be finalised in the second half.
"We had similar issues in BIG W as supermarkets – we tried to do too much too quickly and in retail that’s very hard to execute and you end up dropping the ball," Mr Banducci said.
The review was likely to lead to less radical changes than Ms Macdonald had in mind, he said, and the transformation would be ‘more structured.’
Woolworths does not expect any improvement in BIG W’s trading performance in the second half compared to the second half 2016, when it lost $88 million, suggesting full-year losses of more than $115 million.
If the business deteriorates any further Woolworths could slash BIG W’s book value, which is currently $360 million, or make further onerous lease provisions.
Woolworths also revealed another $117.0 million in losses from its adventure in home improvement, compared with losses of $125 million in the previous period.
Group net profit on a statutory basis was $725.3 million compared with a loss of $2.1 billion in the first-half of 2016 ($972.7 million before significant items), when Woolworths wrote down the value of Masters by $2 billion.
