At time of writing, shares of chain store retailer Woolworths Group Ltd [ASX:WOW] are trading more than 5% lower than yesterday’s price. They currently sit at $23.61 per share.
The group branches out further than Woolies grocery stores to include Big W and Caltex as well as liquor stores BWS and Dan Murphy’s.
Today, Woolworths released their half-year results for 1H19, revealing areas in which the group has struggled to turn a profit.
Woolworths struggles in a ‘challenging’ market
In the update, the company described 1H19 as a ‘more challenging half’ for the group, but are confident that ‘customer satisfaction remains high’.
The report revealed modest growth in continuing operations sales by 2.3%, and a 1% increase in earnings before interest and tax (EBIT).
Net profit after tax (NPAT) sits at $920 million as of 31 December 2018, marking an increase of 2.1%.
However, while sales momentum in Australian food had improved in the second quarter of FY19, Woolworths noted ‘subdued demand and input cost pressure’ during the final months of 2018, revealing the challenging nature of the market.
Woolworths CEO Brad Banducci says the removal of single-use plastic bags had a negative impact on sales momentum. But momentum recovered in the following months, as reflected in the number of items per basket calculated after customers adjusted to supplying their own reusable bags.
In other troubling news, Dan Murphy’s delivered ‘below expectations’, due to a low-demand market with ‘cooler and wetter weather around key events and the timing of New Year’s Eve.’ But the company says there is ‘a clear plan in place’ to improve the discovery of Dan Murphy’s, including focus on a digitally-led customer platform.
Big W recorded a loss of $8 million for the half, driven down by poor performing summer apparel sales. The company still expects FY19 losses to be less than those of FY18, but admit that this is subject to market conditions.
Woolworths change their milk game
Despite these weak areas, the group saw strong demand of their own brand of seasonal food items, increasing by 30% compared to the prior year.
This may improve with the company’s recently revealed stance on the price of milk. Woolworths has announced they will up the $1 milk price to $1.10 per litre with the extra money intended to go directly to Aussie dairy farmers.
While this move will add cost to the average shoppers’ grocery list, CEO Brad Banducci believes it is ‘the right, first step’ and that they’re ‘hopeful that this is the beginning of us being returned to being completely valued by Australian society.’
Australian Dairy Farmers Association CEO David Inall called the initiative a ‘game changer’ for the dairy industry.
And, as The Sydney Morning Herald reports, the 10-cent price increase is ‘a smart move because it avoids the political risk of regulatory intervention in the lead up to the next federal election and puts commercial pressure on rival Coles.’
What this means for Woolies
Banducci summarised the results as follows:
‘While the first half was below our financial expectations, we…are confident that if we remain focused on our key priorities, we will continue to transform our business for the benefit of all of our stakeholders.’
One such transformation includes the $1.7 billion sale of its petrol business to UK retail group EG Group, which is set to be completed by the end of March.
If this passes the Foreign Assessment review board, Woolworths intend to return capital to shareholders and may even issue an off-market buyback.
The group also announced an interim dividend payout of 45 cents per share, scheduled on 5 April. This is up from the previous year’s payout of 43 cents per share.
For Money Morning
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