Cheers to that: Woolworths' food and liquor relief

Woolworths is looking solid in the key areas of food, liquor and online – putting it in good stead to ride out a mixed discount department store trajectory and a troubled hardware outlook.

If it weren’t for the bungled first phase of the ambitious rollout of his Masters hardware chain Grant O’Brien would have been quietly satisfied that the series of tweaks he has made to Woolworths’ core food and liquor business are now showing up in solid sales gains.

Woolworths’ four-quarter comparable stores’ sales growth in its food and liquor division of 2.9 per cent brought the annual lift in sales to 2.7 per cent (total sales, adjusted for the timing of Easter and a 53-week period, were up 4.7 per cent). By comparison, 2011-12 comparable stores’ sales were up 1.1 per cent.

Encouragingly for O’Brien, there is some momentum in the numbers. On a comparable stores basis the rate of sales growth improved from 2.3 per cent in the first quarter, to 2.5 per cent in the second and to 3.1 per cent in the third before edging back slightly to a still-solid 2.9 per cent.

While the numbers aren’t stunning, they are being generated in a difficult and volatile environment for retailers and contrast with the stagnant business that he inherited.

The strong performance of food and liquor, built on a series of relatively small changes to the detail of the business and a leveraging of the customer data Woolworths has been accumulating from its loyalty program, helped the overall group lift normalised comparable stores sales from its continuing operations by 4.8 per cent.

Total sales were up 6.8 per cent to $58.5 billion, powered by the passive expansion spree Woolworths has been pursuing. It opened 175 new stores during the year, including 34 supermarkets and 54 liquor outlets, and refurbished 298 stores. Woolworths budgeted for capital expenditure of about $2.3 billion this year as part of a multi-year dash to lock in future growth.

The blot on the copybook, of course, is the Masters hardware joint venture with Lowes of the US. Woolworths was forced by market speculation into revealing earlier this month that the Masters chain and the associated Danks business would lose $139 million this year, well above the budgeted loss of $81 million.

It conceded that its budgets had been too optimistic and that it had underestimated wage costs and overestimated gross margins, although it is still forecasting that the Masters chain will break even in 2016, a claim that a number of analysts are sceptical of.

With Masters’ sales climbing as the rollout accelerates – they were up 46.7 per cent for the year – O’Brien needs to get the sales mix and cost structures of the chain right if the business isn’t to be an increasing weight on the group’s performance.

The most difficult segment of retailing in recent years has been discount department stores, partly because of the weak consumer sentiment and the strong propensity of nervous consumers to save, partly because of the impact of the strong dollar and internet retailers on the home entertainment sector and partly because of the extremely disruptive impacts of the Kmart model.

The sales performance of Woolworths’ Big W business in the year was all over the place. Comparable stores’ sales were up 3.4 per cent in the first quarter, down 1.4 per cent in the second, down 0.8 per cent in the third and down 4.1 per cent in the final quarter. For the year they were up 4.9 per cent in total but down 0.7 per cent on a comparable stores basis.

Woolworths professed itself pleased with the Big W performance in the context of the retail conditions, continuing price deflation and the fact that the final quarter of the previous year was helped by the federal government’s stimulus program. It said customer numbers and the volume of items sold had increased both during the second half and over the full year.

Retailers in the discount segment (other than Kmart, perhaps) would be praying for the election to be over and done with and hoping for some improvement in consumer sentiment once the seemingly interminable informal election campaign that started when Julia Gillard nominated her date in January is over.

Woolworths’ hotels division, swollen by acquisitions, lifted its sales nearly 20 per cent, or 10.5 per cent on a comparable basis, to the previous year.

The other minor but still interesting number in the result was the continuing growth in online sales.

While Woolworths doesn’t provide a dollar number for those sales they grew about 38 per cent over the year (adjusted for the 53rd week) and appear to be accelerating nicely off a base that is, relative to the scale of the group, still probably quite insignificant.

Strategically, however, it is a space that good retailers need to occupy to protect their positions as consumer behaviour and preferences evolve over the longer term and Woolworths' increasing focus on customer data and its massive physical network means it is well-positioned to build its online presence.