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Woolworths profits dip as covid costs jump

Lewis Jackson  |  24 Feb 2022Text size  Decrease  Increase  |  
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Profits dove at Australia’s largest supermarket as covid-related costs increased across the business.

Narrow-moat Woolworths Group (ASX: WOW) reported net profit after tax of $795 million for the first half on Wednesday, down 6.5% compared to a year before. Covid costs associated with cleaning, security, staff leave and disrupted supply chains lopped $239 million off the bottom line.

“Omicron created new challenges in early January with a record number of team members isolating and material supply chain and stock flow issues,” said Woolworths Group chief executive Brad Banducci in a statement to the ASX.

Dividends fell to 39 cents per share, mostly reflecting the loss of earnings from the now de-merged Endeavour Group. Last year’s sale of the alcohol and gaming segment gave a one-off boost of $6.4 billion to Woolworths.

Wednesday’s slump was broadly in line with a December profit warning. Banducci then called it “one of the most challenging halves in recent memory” as he flagged higher covid costs.

Woolworth’s all-important Australian food segment, responsible for three quarters of group sales, saw earnings before interest and tax fall 7.6% to $1.217 billion, at the top end of the $1.19 billion to $1.22 billion range provided at the end of last year.

Group earnings before interest and tax fell 11% to $1.38 billion.

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Markets responded positively to the result. Shares jumped4.2% in opening trade before closing 1.4% higher. Shares have been in decline since the December warning.

In a volatile trading environment, investors should be cautious about reading too much into six months of results, says Johannes Faul, Morningstar director of equity research.

“Results were pretty much in line with expectations and with competitor Coles,” he says.

“Both Coles and Woolies rose a few percentage points today. I suspect it’s less about the result and more about wider interest in consumer staples given market uncertainty over Ukraine.”

Woolworth’s negative results came a day after no-moat Coles Group (ASX: COL) also posted a fall in net profit. The company similarly blamed covid related costs and investments in online shopping. Net profit fell 2% to $549 million.

Both supermarkets are trading at double digit premiums to Morningstar fair value. Covid restrictions had a mixed impact across Woolworths group. The lingering impact of covid-19 related pantry stocking and strong Christmas trading saw sales rise 8% to $31.8 billion. That compared to a 1% jump in sales at Coles.

Omicron restrictions were a tailwind to supermarket sales growth into the new year, with Woolworths Australian Food segment reporting 5% sales growth in the first two weeks of January.

Sales declined 9% to $2.3 billion at Big W due to covid-related store closures in New South Wales and Victoria. It was the only part of the group to see sales fall. The department stores make up 7% of group sales.

Woolworths also announced a $144 million cost to compensate employees who had been underpaid and expected further payments to follow. It follows the 2019 revelation the supermarket had underpaid staff relative to the award. An ongoing payroll review is expected to complete at year end.

Inflation on the horizon

Banducci flagged rising prices across the group in his outlook statement. Shelf prices rose between 2% and 3% in the second half of last year due to higher costs among suppliers.

“We expect inflationary pressures to continue to intensify due to industry-wide cost increases,” he said. “It is inevitable that some prices will increase; however, we will continue to work hard to ensure that we provide customers with great value and affordable alternative.”

Higher prices had a positive impact on the retailer’s New Zealand business in the first seven weeks of the year, helping lift sales growth by 5% in the food segment.

Supermarkets can benefit from higher inflation if they can pass on price rises faster than wages and rent, says Faul.

"We expect the uptick in food prices to underpin continued Australian supermarket sales growth of around 3% for Woolworths in the second half," he says. Sales growth in the months to June should offset cost pressures, he adds.

The company expects covid-related costs to remain elevated until March before moderating in the months to June. No fixed profit forecast was provided.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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