Woolies Earnings, Investment Boost

Woolworths has warned that it is facing a much tougher task to lift sales and earnings in 2010 given the current outlook for the economy.

But it could be foxing as the private capital spending figures from the Australian Bureau of Statistics yesterday (see separate story) tells a story on an economy about to rebound, probably in the first half of next year, or in Woolies’ second half.

A look at the retailer’s results shows it’s a cash machine, with enormous earnings drive coming from the multi-billion dollar refurbishment of the group’s outlets.

That’s helped boost profit margin in its key supermarkets business by almost half a cent to 5.98 cents in every dollar that passes through the cash registers.

Overall, Woolworths lifted sales, kept a lid on costs, and had negative inventory costs whereby suppliers effectively financed Woolies growth.

But CEO, Michael Luscombe warned spending boosts from this year including the Federal cash splashes, would not be replicated to the same degree in the 2010 financial year.

"Discretionary spending will continue to be influenced by macro-economic factors, such as interest rates, petrol prices and confidence around employment," he said in yesterday’s outlook.

"As a result, consumer confidence levels and therefore spending are very difficult to predict for the fiscal 2010 year."

But the company is looking for sales to grow in the ‘high single digits’ and for earnings before interest and tax to rise faster than sales for yet another year.

The company indicated margins, which reached record levels in the 2009 financial year (the real story of the result) should strengthen in the coming year

(That guidance excludes the hardware joint venture with US group, Lowes.)

Woolworths said its food and liquor division, its heartland, was performing well so far in 2009-10.

But its discount retailer Big W, consumer electronics chain Dick Smith and the company’s hotels division were not going as well as in the prior year, given a stronger comparable period in the six months to december, 2008.

Overall Woolworths posted a full-year net profit at the top of its target range, up 12.8% to a record $1.84 billion.

Revenue rose 7.5% to $49.59 billion, on a comparable 52-week basis.

The company also recorded an 11.5% rise in earnings before interest, tax, depreciation and amortisation for the period.

But the real story isn’t the record net profit of $1.8 billion, more the record annual dividend of $1.04 a share.

Its how it was gained: a combination of the cash splashes in December 2008 and in March to may this year, which coincided with the benefits of the store refurbishment spending which has boosted same store sales growth and earnings much faster than if the company had built completely new outlets.

"Our refurbishment activity in Supermarkets, BIG W and Consumer Electronics is making an important contribution to an enhanced shopping experience for our customers.

"At the time of this release we have approximately 40% of Australian Supermarkets, 13% of New Zealand Supermarkets 15% of BIG W and 17% of Consumer Electronics converted to the new formats.

"We will continue to evolve these new formats to ensure they continue to meet changing customer needs."

The company and its shareholders are getting the real benefit from this spending, as is the economy with Woolies one of the biggest spenders at the moment outside resources.

Woolworths plans capital expenditures of $1.9 billion in 2010, to drive this refurbishment operation and the start of the hardware division.

“Our entire team has achieved this record result in the most challenging year most of us can remember.

"This demonstrates that Woolworths is built for sustainable results over the long term, and that our strategies are being delivered consistently across our divisions," Mr Luscombe said in yesterday’s report.

"Our strategies in New Zealand Supermarkets and Consumer Electronics are starting to deliver, with improved results in the second half.

"Despite the strength of this result, we cannot afford to rest on our laurels, take our customers for granted, or to use short-term thinking."

Second half net profit rose 16% to $852.4 million for the June half, (ending June 28) from the $735.5 million in the June half of 2008.

It declared a final dividend of 56 cents per share, fully franked, taking the total payout for the year to a record 104 cents share, up 13%.

Woolies said earnings before interest and tax for its core Australian food and liquor business rose 17.4% for the year to $2.29 billion, while its petrol business lifted EBIT 9.5% to $81.9 million, up 9.5%.

The consumer electronics (Australia and NZ) saw EBIT fall 17.6% to $55.1 million and hotels EBIT rise 3.3% to $218 million.

The BIG W division saw a strong result; for the third consecutive year it delivered double digit increases in both revenue (adjusting for the 53 week last year) and earnings.

Sales grew by 10.5%. Comparable sales for the full year were 7.1% (FY08: 4.7%). EBIT grew faster than sales, increasing by 25.9% to $200.2 million, a significant milestone for BIG W.

New Zealand supermarkets saw a 7.4% drop in EBIT to $NZ153.9 million ($A126.52 million) in the second half, but overall EBIT was up 4.1% at $A208.1 million.