Has Woolworths turned a corner?

Woolworths' annual sales results show the retailer's decision to get on the front foot in the last quarter and spend some cash may have helped it turn the corner after a tough 12 months.

In the final quarter of 2011-12 the two big supermarket chains threw a lot at the market. Judging by Woolworths' annual sales results, it did have an impact.

During the quarter both Woolworths and Coles re-launched their loyalty programs, unveiled new advertising campaigns and continued to discount aggressively. After flat-lining sales in the third quarter it would appear all that effort created some traction for Woolworths.

Fourth-quarter sales were up 3.8 per cent, although the more significant number was the 1.3 per cent rise in comparable stores sales. While modest – given the price deflation occurring, particularly in produce prices (down 5.7 per cent for the full year) – coming after a third quarter in which comparable store sales flat-lined it was a creditable result.

Whether it is the first indication of a small improvement in the difficult retail environment won’t become clearer until the other big retailers report and there is an opportunity to understand what’s happened to their margins in that final quarter – but Woolworths appeared optimistic that there is some improving momentum in its core supermarket operations.

The total increase in fourth quarter sales was driven, however, by Woolworths' new store opening program, with another seven new stores opened in the quarter.

Woolworths, which opened 38 new supermarkets and 20 Dan Murphy’s liquor outlets during the year, is pursuing a far more aggressive expansion program than Coles, which has focused more on improving the productivity of its existing network.

Overall, propelled by the larger store network and the continuing roll-out of the Master hardware chain, which now has 15 stores and $828 million of sales, Woolworths added $1.8 billion of sales (excluding petrol) in the financial year and ended the year with a smidgeon less than $50 billion of sales ($56.7 billion if petrol sales were included). In the past five years it has added $10 billion of annual sales.

Woolworths’ Grant O’Brien would also have been pleased with the apparent stabilising of the Big W discount department store business, where sales have dwindled as the retail conditions have deteriorated and competition with the likes of Kmart and Target has intensified.

While Big W’s full-year sales rose a meagre 0.5 per cent, and on a comparable stores basis fell 1.5 per cent, in the further quarter they rose 4.6 per cent and comparable stores sales were up 1.6 per cent.

There was some impact from the federal government’s latest "cash splash" in the last five weeks of the year, which creates a question-mark over the sustainability of that improvement, but Big W’s sales have been on a steadily improving trend throughout the year.

Another indication that conditions generally may have improved slightly came from the Dick Smith consumer electronics business, which Woolworths has earmarked for sale and which is experiencing a major store rationalisation program in preparation for that sale, with 52 stores across Australia and New Zealand closed during the year.

Despite the closures full year sales were up 2.1 per cent – 10.4 per cent in the fourth quarter – and comparable store sales in that final quarter were up 15.4 per cent.

It may, of course, be the case – and probably is – that the surge in sales came from dumping stock in preparation for the sale of the business.

The cost of those extra sales will be clearer once Woolworths’ earnings report is available, but the available sales numbers for the other major electronics retailers would suggest that the rationalisation of the Dick Smith chain has been another disruptive and expensive factor for a sector already suffering from the strength of the dollar, the growth in online retailing and the continuing defensiveness of consumers.

Until the sales performances of Wesfarmers’ retail brands – Coles, Bunnings, Target, Kmart and Officeworks – is available later this week it is difficult to draw too many meaningful conclusions from the Woolworths numbers other than that the year ended on a slightly more optimistic note than appeared likely after the third quarter performance.

The Coles business does have considerable underlying momentum and is heading towards its fourth year of comparable stores sales growth. It is expected to again report stronger growth than Woolworths – it was tracking at 4.6 per cent total growth and 3.9 per cent comparable store sales growth for the first nine months of the year.

The other emerging feature of retailers’ sales and earnings announcements will be their discussions and disclosures around their online offerings.

While Woolworths’ online offering, as with all the major retailers, is in its infancy the group is rolling out its "multi-option’’ strategy and platforms rapidly. Today it said that, while total online sales were small in the context of the rest of its businesses, they increased by 95 per cent in the financial year, or 48 per cent excluding the Cellarmasters business.

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