Christine St Anne: Woolworths and Wesfarmers both released their sales figures for the fourth quarter this week. Morningstar's Peter Warnes joined us to get the truth behind the numbers.
Peter Warnes: Thanks, Christine. Good to be here.
St Anne: Peter, the strong sales growth by both companies were attributed to the government stimulus payments. Because of that, do you think that the sales numbers are sustainable?
Warnes: Christine, those government payments were of significance in the fourth quarter, and more importantly in June, but they weren't the only positive influences on the sales figures - and donï¿½t forget two interest rate cuts prior to that quarter are filtering through. And of course the majority of people who have mortgages are on variable rates, and that increases immediately the household disposable income.
So, if you put interest rates together with those government payments, then that makes a very solid boost and gives a solid boost to those sales. But both companies indicated that the trend was positive prior to June and June was the icing on the cake, if you like. So, are they sustainable? Well, the interest rate cuts are still filtering through and who knows there could be another interest rate cut in August, but I suspect not.
But the payments have a one-off situation. I would think that the more of the problem is what's going to happen to household disposable income when they start receiving their electricity accounts, and gas accounts, and water accounts in June - in July, August and September and they are very, very big increases. And so that might just take the edge off the positive trend, albeit there just seems to be that people are starting to spend a little bit more now and I would expect that probably to continue.
St Anne: Peter, Coles achieved higher sales growth than Woolworths and yet Woolworths has increased its floor space more than Coles. Is the growth strategy for Woolworths paying off?
Warnes: Christine, both companies have a different strategy in terms of how they are trying to increase foot traffic and therefore increase sales. Woolworths has decided to go on the front foot and aggressively open supermarkets. In FY'12 they opened 38 supermarkets, that is the highest number of supermarkets ever opened on an annual basis in Woolworths' history. It will peel off a little bit in 2013.
Of course, that really does impact - it impacts your headline sales, because you've got more stores and say you're getting some sales, but it also suggest that there might be some cannibalization of their existing stores. I would suspect that Woolworths - the momentum was favorable in the fourth quarter, disappointing in the third quarter and I would think that they are really starting to try to reinvent themselves, if you like, more initiatives, more loyalty programs et cetera, et cetera. So, look Woolworths, I think, will probably gradually improve going through 2013.
Coles on the other hand have decided to not open too many stores, in fact they opened 19 and closed 11 for a net 8, but they very, very strongly pushed into refurbishments. So, they are getting more bang for their buck in refurbishments and that is helping their comparable store growth, because they are not opening new stores and so those stores they're refurbishing are already opened for a year and so that's why they're getting better comparable store sales.
So, what's happening is that the growth of the headline rate for Coles is still outperforming Woolworths, but the comparables are still outperforming Woolworths as well, albeit that Woolworths did close the gap in both metrics in the fourth quarter.
St Anne: Target and Big W also both lifted their sales. Is there a little bit of optimism creeping back into the discretionary side of retailing?
Warnes: I wouldn't call discount department stores really discretionary. So, we've just got to be a little bit careful there. Look, the government payments that did hit when households do get an injection of money, they're going to look after the kids normally. So, both Target and a Big W had very, very good sales in, strange enough, in soft goods, in other words apparel, some homewares were much better, getting a new pot and pan and what have you, and also Target brought their toy sale - brought it forward.
So, those things were definitely impacted by the government payments. There is no doubt, in fact Richard Goyder had indicated that government payments really were worth about 1% of sales in the fourth quarter. I wouldn't think that there is a great turnaround in discretionary spending just on the back of fourth quarter sales of those two discount department stores.
St Anne: Peter, finally with the earning season coming up next month, what are your expectations for Woolworths and Wesfarmers?
Warnes: Christine, of course a lot will depend obviously on what's happening with margins. I mean they've got the volume up and the dollar sales are up. It comes back to margins. I would expect that the margins will be at least maintained and probably improved slightly. The reason for that is that it's all to do with volume growth and when you take into account the deflationary pressures that are in the supermarket space and across the other areas as well. Coles had real growth in the fourth quarter of 7% and over 6% for the full year and Woolworths was 5.3% in the fourth quarter and about 4% in volume terms for the full year.
Now, that volume growth it's how efficient the distribution networkers are, Woolworths is very, very efficient, Coles is catching up. So, the supply chain efficiencies, the productivity loop, if you like, they are the critical things that will impact margins favorably. So, I expect the volume growth to dictate what happens to the margins. So, I'm looking for pretty reasonable growth in EBIT and ENPAT comfortably above the headline sales growth numbers.
St Anne: Peter, thanks so much for your insights today.
Warnes: That's a pleasure, Christine.