Wall Street’s selloff wasn’t the reason for the slide in Woolies
(ASX:WOW) shares on Thursday to a new 52-week low – it was the surprisingly weak performance of the company’s supermarkets with rising fresh food prices hitting hard, as well as a big profit downgrade for its NZ food business.
The release shows the major reason for the weakness in Australian supermarkets (but not its Big W department store chain) was the return of shoppers to bricks and mortar outlets instead of buying online as they did in the same period of 2021 when they were locked down, especially in Sydney and Melbourne.
But it seems that, despite having been freed from confinement, and returning to Woolies stores, consumers didn’t spend as much when they got there to find rising food prices, especially for fresh fruit and vegetables and higher prices for other products such as bread, flour, milk and pasta.
That in dampened their spending both in store and online.
However, buried in the result was the big story from the release – the news from its New Zealand stores of a possible halving in trading profit there for the six months to the end of December thanks to slower sales, higher inflation and wages.
Woolworths Group CEO Brad Banducci revealed that, with regard to New Zealand Food, “we are seeing signs of stabilisation in the trading environment; however, given the combination of lower sales and materially higher wage inflation, we currently expect” first half earnings before interest and tax (EBIT) to fall to a range of $NZ100 to $NZ130 million from the $NZ200 million reported for the six months to December, 2021.
He said that “At this stage, we expect [second (June) half EBIT] to be above the December half and above the June, 2021 half” but also cautioned there was “uncertainty on the trajectory of the improvement.”
For the quarter ended October 2, Woolworths said it lifted group sales 1.8% to $16.33 billion which was a modest but positive result.
But investors quickly cottoned in to the fact that the rise was due to much better-than-expected performances from its Big W and Australian B2B businesses, which offset softer performances from the core Australian Food and the weakness of the New Zealand supermarket businesses.
Woolies shares lost 3.5% to end the day at $32.05 after hitting a 52-week low of $31.67 in early trading.
The key Australian supermarkets business saw a 0.5% decline in sales to $12.204 billion, for a 1.1% fall in comparable store sales, the key measure in retailing of sales performance.
Woolies said thus was due largely to its online channel, which reported a big pullback in sales after benefiting from lockdowns a year earlier
But it also means that Woolworths supermarket sales performance underperformed rival Coles Group which reported a 2.1% rise in same store sales for its third quarter.
Mr Banducci, said in Thursday’s release: “While year on year sales growth rates were impacted by the cycling of COVID in the prior year, customer shopping behaviours and the trading environment continued to normalise during the quarter.
“Pleasingly, customer scores have improved compared to H2 F22 but remain a key focus in the lead up to Christmas.
“In our Food businesses, sales were below the prior year as we cycled strong growth driven by COVID-related restrictions in F21 and F22. Australian Food sales decreased by 0.5% and New Zealand Food sales were down 2.5% compared to the prior year.”
“In Australian B2B, Q1 sales increased by 26.0% compared to the prior year primarily due to strong growth from PFD.
Big W sales were up 30.1% compared to the same quarter of last year when there were lockdown-related temporary store closures.
“eCommerce sales in Australian Food fell 10.8% and 51.8% at Big W in the latest quarter from a year ago.
“Inflation continued to accelerate in Q1 compared to the prior year with average prices in Australian Food increasing 7.3%, and 5.3% in New Zealand Food.
“We continue to see early signs of customer purchasing habits changing, but it remains unclear how much of this relates to cost-of-living pressures compared to COVID normalisation.”
Mr Banducci said October has seen an improvement in year-on-year sales growth trends in the Australian supermarkets “as we cycle out of the NSW and Victorian lockdowns of last year, with the three-year sales growth rate broadly in line with Q1.”
Analysts say that depending on the size of the shortfall from NZ and the impact of weaker sales here in the supermarkets, Woolies would be heading for a lower first half profit.
