Woolworths

After reporting no growth from its food and liquor business in the third quarter of 2012, Woolworths reported a slightly better result—1.3% same-store sales growth—for the fourth quarter. Price deflation continues to be a significant issue, particularly in fresh produce, bakery, deli and seafood.

The liquor business is stronger than food, with the company reporting little cannibalisation of its convenience formats (such as BWS) despite strong growth from its ‘big box’ brand Dan Murphy’s.

Big W also reported a welcome lift in fourth quarter same-store sales, which rose 1.6%. The most recent quarter was the only one in which Big W’s sales actually grew in 2012. So is the bounce in food and liquor and Big W evidence of a return to better times?

Probably not. With the carbon tax coming into effect from 1 July 2012, the government’s compensation package started arriving in the bank accounts of low to middle income earners in May and June. Like the government stimulus package in 2009, this cash has found its way to retailers.

We expect this benefit to be short-lived, but Woolworths’ share price has run up 6% since 1 Jun 12 (Long Term Buy – $26.44) anyway. With the stock now above our recommendation guide limit, we’re downgrading to HOLD. We’ll comment again at the company’s final results release in late August.

Note: The model Growth and Income portfolios own shares in Woolworths.