Woolies fights hard for gain

Blair Speedy
March 01, 2013
The Australian

WOOLWORTHS boss Grant O’Brien has reined in his rhetoric against the competition regulator while warning that the supermarket giant’s slight upgrade in earnings forecasts yesterday did not mean things were getting any easier in retail.

Speaking after the release of a first-half profit of $1.25 billion, up 4 per cent from last year, Mr O’Brien tweaked Woolies’ earnings guidance, now tipping annual net profit after tax to grow by between 4 to 6 per cent excluding one-off items, up from previous forecasts for growth of 3-6 per cent.

“The market that we’re operating in is not the most stable of markets and our guidance reflected that and we wanted to send a message with our adjustment . . . but not to get carried away,” he said.

“It remains a fairly subdued market; it remains that we have to work really hard to get the benefits and gains that we’re getting in this business.”

Woolworths is the latest retailer to warn investors not to get carried away by the prospect of a market upturn this year, with JB Hi-Fi, Specialty Fashion Group and David Jones all framing their first-half profit reports with forecasts for tough conditions to prevail through 2013.

Mr O’Brien also softened his stance on the Australian Competition and Consumer Commission, after last week slamming chairman Rod Sims over his support for a formal code of conduct to govern supermarkets’ dealings with suppliers.

“When there are calls for regulating choice in a supermarket, I really start to wonder where the Australian consumers’ interests are being prioritised,” he told a Brisbane business lunch last week.

However, Mr O’Brien yesterday refused to make further inflammatory statements against the regulator, which is also investigating the impact of fuel discount “shopper docket” vouchers on the petrol retailing sector and closely examining every land and store purchase made by Woolworths after it refused to submit to a voluntary approval regime.

“We’ve always had a good relationship with the ACCC and we’ve co-operated fully for all of the years I’ve been involved in this business, and there’s been no interruption or change to that,” he said.

However, he did defend the company’s use of shopper dockets, saying they were an easy way for shoppers to stretch their household budget.

“We’ve got a contract with our customers to provide an offer to them that helps them deal with the rising cost of living, and petrol is a lightning rod for that in any household economy,” he said.

Woolworths’ breadwinning Australian food and liquor division reported earnings before interest and tax of $1.66bn, up 6 per cent from the previous first half, while sales were up 3.8 per cent to $23.8bn.

While this pace of growth was less than half that of arch-rival Coles, which last month reported EBIT growth of 15.1 per cent to $755m on sales of $18bn, up 4.8 per cent, Mr O’Brien indicated he would prefer to play it slow and steady.

“The team have been focused on steadily improving the business, and that’s what I’m pleased about — it’s a good result but it’s sustainable . . . ours is a business that has plenty of upside.”

Gross margins at the supermarkets division rose by 31 basis points to 25.14 per cent in the first half, but divisional boss Tjeerd Jegen said this was partly driven by a 1.2 per cent reduction in fuel sales — which are made at wafer-thin margins — as the company elected not to match the 8c per litre fuel discount offer Coles has been running for the past four months.

Mr O’Brien said while Woolies cut average shelf prices by 2.8 per cent during the first half, it was pursuing a more focused discounting strategy through the use of its loyalty card scheme, under which shoppers are sent discounts based on their personal preferences.

“Rather than a shotgun approach, it’s a rifle approach,” he said.

He declined to comment on reports Woolies was interested in buying SA winery Barossa Valley Estates, which fell into administration last month, but liquor divisional boss Brad Banducci noted the company’s existing wine business was having considerable success with its proprietary wine brands.

The hotels business, Australia’s largest operator of poker machines, reported a 21 per cent gain in EBIT.

Citi analyst Craig Woolford described the result as mixed, with the strength of the food and liquor division offset by what appeared to be a very weak half in the Masters home improvement division. “The risk of larger losses in Masters may weigh on the stock,” Mr Woolford wrote in a briefing to clients.

Woolies did not break out the Masters result separately, but reported a $115.2m loss at the EBIT line for “central overheads and home improvement”.
The company opened 10 Masters stores during the first half, bringing the total to 25.