A fresh look at Woolies

The market was disappointed with Woolworths' first-half sales numbers. There wasn't actually that much wrong with the numbers, but rather that the reference points were artificially inflated by last year's massive stimulus packages and much higher levels of food inflation.

As Business Spectator's retail blogger, Rob Lake, has written it isn't possible to be definitive about Woolworths' performance until the sales numbers for its key competitors, Coles and Metcash, are in. What is apparent, however, is that they suffer only by comparison with the sales the group was posting a year earlier.

The 9 per cent increase in Australian food and liquor sales in the December half of 2009, or the 11.1 per cent increase in consumer electronics sales for that same period, or 10 per cent growth in Big W's turnover, were aberrations created by the combination of the stimulus that poured into, and out of, low and middle-income households and, in the case of the supermarkets, high levels of food inflation.

In the most recent half, growth in food and liquor sales of 6.8 per cent is still very respectable, particularly when Woolworths' calculation of food inflation says that it has dropped from 4.1 per cent to 1.6 per cent over the course of the past year. The waning residual impact of the stimuli and declining inflation may also helps explain a slowing of growth between the first and second quarters.

What we don't know, and can't until the other key players report, is whether Coles in particular has continued to gain ground on its arch-rival.

There were strengthening signs last year that the re-making and re-positioning of the Wesfarmers-owned group's was starting to gain some traction with consumers and generate some sales momentum. There appears to be growing confidence within Wesfarmers that the strategies of Ian Mcleod and his team are working.

The relatively modest growth in Big W and consumer electronics would also be explicable in terms of the tapering off of the effects of the stimulus packages, although there remains a query about the impact of Wesfarmers' Target and Kmart brands.

Target has been engaged in increasingly fierce competition with a reinvigorated and aggressive Myer (which has its own forecasts to achieve), while there are suggestions that the perennially disappointing Kmart may have found a market positioning that works, or at least is producing better results than its erratic retail strategies in the past.

Woolworths itself claims its supermarkets have achieved "solid" volume and market share growth, with real comparable sales growth rising from 2.5 per cent in the first half to 3.2 per cent. It says it is experiencing increasing customer numbers, more items sold and increasing basket sizes as a result of its rewards program and alliance with the Qantas Frequent Flyer scheme.

It has reaffirmed guidance of upper single digit growth in group sales for the full year, with earnings before interest and tax expected to grow faster than sales and after-tax earnings to grow by between 8 per cent and 11 per cent.

Woolworths generally delivers on its guidance, although the market tends to factor in out-performance, pricing the group for a level of perfection that the market response to the sales numbers suggests may be difficult to achieve.

The other issue for all the retailers, particularly those in the very competitive value segments of general merchandise and apparel, is whether they have traded margin for volume. Woolworths' guidance would tend to suggest that it is confident it has controlled the volume/margin equation, but that will only be confirmed once its profit numbers, and those of its main competitors, have been posted.