Woolworths beat on sales creates fear on earnings
Long considered the laggard when it comes to growth, Woolworths has easily beaten expectations in its fourth quarter sales figures. But serious concerns have emerged about margins, raising fears of a lacklustre earnings result this year.
Released minutes before the market opened, the key statistic was supermarket performance which showed 2.9% growth on a comparable store basis in the fourth quarter. That was well up from expectations of 2.3% growth.
Food and liquor provides the vast bulk of Woolworths earnings and this morning’s numbers indicate the company is back on track, at least with sales growth.
Investors greeted the news poorly, marking Woolies down by more than 3% in early trade as they fretted about the relatively poor performance of Big W and particularly the impact of price deflation.
While sales showed solid growth, price deflation of 3.5% during the quarter was well ahead of the official retail sales deflation of around 0.6%, suggesting that Woolworths has taken the scythe to margins as it goes head to head with Coles on discounting (see Cliona O'Dowd's Collected Wisdom).
Just how much impact that will have on profits has yet to be determined but newly installed chief executive Grant O'Brien has been on a mission to reduce costs in the business to minimise the impact of discounting.
Across the group, full-year sales rose to $59.16 billion, up 2.4% on a normalised basis. Momentum clearly picked up in the fourth quarter, however, with sales growth of 12.2%.
Fuel showed fairly lacklustre growth, while the New Zealand division performed much better than anticipated.
The trouble-plagued Big W division also showed subdued sales growth of 2%, while hotels – where the company has an unassailable lead over Coles – grew 19.7%.