Woolworths has a pain Down Under

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Woolworths has a pain Down Under
Credit: © Reuters.

I'm afraid there was nothing organic, healthy or delicious about the Woolworths (ASX: WOW ) trading update for the 26 weeks ended 26 December 2021.

A drop in headline earnings per share (HEPS) of between 30% and 40% isn't much of a Good Business Journey, either. Although there are some valid reasons for the drop, the truth of it is that Woolworths is still suffering in Australia and is under pressure at home.

I'm astounded that the share price only fell 1.6% based on this result.

Group

Most retailers report on a 52-week basis rather than a usual calendar basis, which results in a 53-week result every few years. This is why the result is a "26-week update" rather than an "interim update" as would be the norm.

Over this period, group sales fell 2.1%. It's a big deal for a retailer's sales to go backwards. The drop was 0.3% in constant currency terms, with the Australian Dollar as the relevant currency for Woolworths.

Online sales at least did well, up 22.4% and now contributing 13.7% to the group's total turnover.

In an attempt to improve the narrative in this result by talking to the momentum over the period, Woolworths highlights that sales in the last six weeks of the period increased by 3% in ZAR and 3.5% in constant currency terms. The problem is that the trading in those final weeks didn't improve in Fashion Beauty Home (FBH) which has been a thorn in the group's side.

Woolworths took major knocks from the extended lockdowns in Australia and by the civil unrest in South Africa.

South Africa

In South Africa, the much-loved food business grew turnover by 3.8%, with the last six weeks reflecting a 5.8% gain. That is not fantastic compared to recent numbers seen out of Checkers. I've had this debate on Twitter with a few people and my view remains that Checkers is taking market share from Woolworths. I can see it happening in our household and among my friends.

Woolworths argues that the base period was a time of increased home consumption as restaurants were either closed or heavily restricted. Whilst there is truth in that, my view on Checkers as a major threat remains firm.

Margins are under pressure here, evidenced by price movement of 2.6% despite product inflation of 3.7%. This means that Woolworths is having to suck up some of the inflationary pressures in an effort to drive volumes (which only grew by 0.2%).

Online sales in Food increased by 55.8%, now contributing 3.1% of sales. Space grew 2.2%, so the format is still expanding.

The FBH business posted a better sales result than Food this time around, with turnover up by 4.7% in comparable stores. Total turnover only increased 4.2%, which means the group has decreased its space as new store growth was negative. The footprint is 6.1% smaller. Online sales were up 19.2%, now contributing 4.4% of South African sales.

Trade in the final six weeks was disappointed by the Womenswear division. The Woolworths Financial Services net book grew by 5.3%, faster than both underlying divisions. This tells me that relatively more sales are on credit than in the prior period.

Australia and New Zealand

At one point, it would've been hard to imagine how things could get worse for this business. Then, along came Covid. It's important to remember in life that things can always get worse.

During this period, the rather... strict governments in that region ensured that 70% of the brick-and-mortar stores couldn't trade. In the final six weeks of the period, positive growth resumed as Aussies were allowed to leave their basements.

David Jones saw a drop in turnover in comparable stores of 9%. It grew 3.2% in that golden six week period, which is hardly an exciting number. Woolworths points out that Boxing Day sales were in the comparable period but not in this one, so on a "Boxing Day sales adjusted" basis the increase would've been 7.7%.

Country Road Group sales fell 3.2% in comparable stores and grew 1.7% in the last six weeks. No Boxing Day adjusted number is presented, which probably means it was still pretty bad.

Online sales in David Jones increased by 44.2% and contributed 28.1% of the total. In Country Road, online sales increased 3.6% and contributed 33.8% to total sales.

I think Novak Djokovic is the only person who has had a worse experience in Australia than Woolworths.In summary: ouch.

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