Markets: Woolworths wows with promise of growth

Woolworths’ chief executive Grant O’Brien initially must have wondered this morning just exactly what he needed to do to impress the market. After reporting an 8 per cent increase in net profit from continuing operations to $2.35 billion the stock initially fell, shunning rises in earnings across Australian food, liquor and petrol, New Zealand supermarkets, Big W and hotels, before interest and tax.

At 1206 AEST Woolworths shares had recovered their lost ground and were up 35 cents, or 1 per cent, to $34.26. The stock has gained 8.5 per cent since mid June.

Still, the company warns today that retail conditions will “remain subdued” in Woolworths’ 2014 financial year.

“Cost of living pressures (and) a flat job market” may be alleviated after September 7 by a new government, giving business some certainty on policy - but don’t bank on it, Woolworths says.

The company is intently pressing ahead with its expansion. Woolworths plans to open as many as 30 supermarkets a year, with 28 planned in 2014. It may open as many as five New Zealand supermarkets in coming months, some 15 Dan Murphy liquor stores, and up to 10 beer, wine and spirits outlets annually. It has also slated a possible five Big W stores a year, more home improvement retail outlets and 17 new petrol stations.

All this will boost sales of course, but what about margins? While gross margins at Woolworths rose by 129 basis points in 2013 there’s no guarantee that will continue. Population growth threatens to lag store openings unless there is unexpected rapid economic growth.

But Woolworths' dominant position and essential offering will assure its business does not stagnate. The company itself forecasts as much as 7 per cent net profit growth in 2014. In uncertain economic times, it may be a stock that outperforms both its peers and the broad market.