WOW Up, Down

Far from sending a message to would be rivals, Wesfarmers and Coles Group, Woolworths seems to have disappointed the market in advancing the release of its 2007 financial year (and fourth quarter) sales and profit guidance by a week.

The news in the release was OK, sales and probable earnings are at record levels, butnot a surprise on the upside which seems to have been the secret, unwritten wish in many broking estimates.

Woolies raised its earnings guidance from the range of 20% to 24% to the range of 25% to 27%. That, in the view of some investors, was hardly something to make a song and dance about and could have easily been released next Tuesday with suitable fanfare.

A rise at the top end of the new guidance would see the retail giant earning around $1.28 billion in the year to June 30.

But the market took fright, WOW shares shedding 86c to a low of $28.19 in the morning before rebounding to around $28.56. That was a drop of more than 3 per cent and it wiped out Monday's rise of 55c to $29.05 amid a burst of enthusiasm on a day when the market hit new records.

But in the afternoon WOW shares were again sold off, falling to a new day's low of $28.10, down 95c on the day. They closed at $28.18 on turnover of more than 5.6 million shares.

Coles' shares edged higher to $15.21, up 8c. Wesfarmers' share price jumped 40c to $41.75 but then fell away to end at $41.18, down 17c and just above the merger danger level of $41.16.

The common comment from analysts was that this was as good as it will be; Woolies and investors cannot expect another year of 20 per cent plus earnings growth.

There was no mention of dividend from Woolies and the company has already warned that this result will be weighed down on an earnings per share basis by "shares issued under the Group's employee share option plans, on acquisition of FAL and under the Dividend Reinvestment Plan underwriting arrangements", as directors said in the guidance statement with the interim result in February.

First half net earnings rose 28.1% to $695 million. The company's second half was always expected to be a bit slower with sales growth coming back as the comparative effect with the new supermarkets and the NZ stores rolled off, so the slight improvement is a bit better than what was expected a few months ago.

But expectations have been raised that the problems at Coles of the failed relaunch, loss of sales and market share and the protracted sale/takeover process, would see WOW ram home its advantage: which hasn't quite happened.

WOW earned a net $1.01 billion in the 2006 financial year, so around $280 million will have been added in 2007 on sales which jumped 12.6 per cent to $42.3 billion for the year (And up 9.6% in the fourth quarter alone, compared to an 8.8 per cent rise in the third quarter).

"As a result of the continued strong performance of the business our earnings guidance has been increased with net profit after tax for FY07 (fiscal 2007) now expected to grow in the range of 25 per cent to 27 per cent," Woolworths chief executive Michael Luscombe said in a statement to the ASX.

"The result is based on consistent and successful delivery of our strategy by the Woolworths team," Mr Luscombe said.

"The result reflects excellent sales, underpinned by an improved customer offer, including significant reinvestment into price and as previously advised, costs relating to our supply chain transition and impact of full smoking bans."

Australian Supermarkets is the heart of the business: WOW said fourth-quarter sales from Australian food and liquor, its biggest unit, rose 9.7 per cent to $6.4 billion while on a same store basis (stores open at least 12 months) sales rose an impressive 8.2 per cent, up from the 4.3 per cent rate of a year earlier.

Food price inflation fell to 2.2% in the quarter from 3.0% a year earlier because of the higher price of bananas.

Fuel sales rose 3.9 percent to $1.2 billion in the quarter (0.6 per cent comparable or same store sales).

Sales at Woolies New Zealand supermarket rose 11 per cent to $929 million in the quarter (4.7 per cent same store basis), revenue at Big W discount stores rose 14 per cent to $754 million in the quarter (8.7% higher on a same store basis); sales at the hotels unit rose 8.6 per cent to $240 million, (slowing from the 39 per cent growth as smoking bans hit the business). Same store sales in the pubs business were up 3.3 per cent in the quarter.

The consumer electronics unit, which includes Dick Smith, Tandy and Powerhouse, enjoyed a 12.7 per cent growth in fourth quarter sales $294 million, with same store sales up 7.7%.


For the full year Woolies said the 12.6 per cent rise in sales was made up of:

Australian Food and Liquor: sales for the year were $27.7 billion, an increase of 9.0% over last year, with comparable sales for the year increasing by 6.6%.

New Zealand Supermarket: sales of $3.9 billion for the year represented an increase of 51.2% over the previous year, reflecting the inclusion of this business in the overall group results from 2 November 2005.

Petrol sales: for the full year were $4.8 billion, an increase of 10.2%, which was driven by solid increases in comparable volumes and continued rollout of new canopies. Average sell prices were lower than the previous year in the last three quarters of the year. Petrol comparable sales increased by 5.0% during the year (0.6% in the fourth quarter), with comparable volumes having increased 4.8% over the year.

Big W sales: for the full year were $3.5 billion, an increase of 11.1% over the previous year. The result reflects a continuation of the positive momentum in this business. Comparable sales for the full year were a pleasing 3.4%, reflecting a strong second half sales result.

Dick Smi

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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