Profits: Woolies Hit By Sluggish Growth Forecast

It shouldn't have been all that unexpected that the guidance for the current 2012 financial year from giant retailer Woolworths would not be up to its previous high levels of sales and profit growth.

After all, the company had an unfortunate first earlier this year when it halved its sales and profit guidance for the first time in a decade after first half profits and revenue fell victim to last November's rate rise and the increasing caution of consumers, especially outside of food and liquor.

The conservatism in the reduced guidance in February was underlined yesterday when the retailer reported a 5.1% rise in profit, at the bottom of the reduced range.

Woolworths said net profit was $2.124 billion for the year to June, up from $2.02 billion a year earlier.

That was a bit short of some analysts forecasts.

Woolworths said the increase was 6.4% when natural disaster (Qld floods and NZ earthquakes) costs were excluded.

And it added that further forecast that subdued trading in 2012 would limit returns in the current year.

And that sparked a rare sell-off in the retailers shares which fell more than 5% on the day.

The shares fell 5.6% or $1.52 to $25.75 yesterday. They hit a low for the day of $25.65.

Woolies said higher saving by households in response to uncertain conditions at home and offshore, and weak consumer confidence, will restrict earnings growth.

Analysts said that if demand slowed further, Woolies was in danger of a profit fall in the current year.

"The retail sector continues to endure the toughest conditions in this current economic cycle, as household savings rates are driven higher by uncertain global and domestic factors," directors said yesterday.

"Consumer confidence has fallen. This was seen particularly in the second half of last financial year.

"Therefore it remains very difficult to predict accurately the outlook for FY12; however, we anticipate trading over the year will be subdued.

"As Woolworths plans for future growth, through expansion into the circa $40 billion home improvement market, we anticipate start-up costs for Masters of up to $100 million, which will impact our overall earnings in FY12.

"The amount of these start up costs is dependent upon a range of factors, particularly the pace of our new store roll out.

"Woolworths is well positioned in all its market segments and has a strong and sustainable business model geared towards the less discretionary retail segments.

"Therefore we expect a year of further earnings growth in FY12 with Net Profit after Tax expected to grow in the range of 2% - 6% subject to the uncertainties detailed above."

That echoes warnings from Myer and David Jones, the two big department store operators, and limited forecasts from the likes of JB Hi-Fi and a range of smaller retailers.

But not all are moaning: only last week Wesfarmers, the owner of Coles supermarkets and Bunnings hardware (which Woolies is taking on with its Masters chain), said the increased saving by consumers was "not a bad thing".

"This is not a disaster. This is a more challenging time," Wesfarmers CEO Richard Goyder said last week while unveiling a 23% rise in earnings at Coles for fiscal 2011.

"Policy makers have been banging on for years about Australians needing to save more, and we're doing that," he said.

Wesfarmers' shares rose in contrast from Woolies' performance, ending the day up 49c at $30.

Supermarket sales held up better than Woolworths' discretionary businesses including discounter Big W which has been hurt by the cautious consumer mood.

Australian food and liquor earnings rose 7.5% for the year.

Earnings at Big W fell 11.5% for the year but rose 5.7% in the second half.

Consumer electronics earnings in Australia and New Zealand fell 27% for the year.

The Woolies supermarkets and food and liquor businesses lifted their EBIT by 7.9% to $2.79 billion, and generated 6.63c of EBIT (the so-called EBIT margin, the most important measure of profits in the industry) for every dollar of sales.

Even after its strong rise in EBIT for 2011, Coles only kept 4.2c in the sales dollar as EBIT, so it has a way to go to catch the leader.

But in the non-food and liquor area Woolies' Big W discount store chain saw EBIT fall by 11.5% and its EBIT to sales ratio fell from 4.77% to 4.26%.

The group's separate consumer electronics business saw EBIT fall 18%.

Coles Kmart chain lifted its EBIT by 5.8% and boosted its EBIT to sales margin from 4.7% to 5% to get its nose in front of Big W on that measure.

But the other Coles group, target, struggled during the year.

Overall, Woolies lifted earnings before interest and tax by 6.3% to $3.27 billion in the June year, but Coles, coming off a much lower base admittedly, still stood out with a 21.2% lift in EBIT.

But Coles has momentum, as the 0.60% improvement in its supermarkets and liquor EBIT margin showed.

Now that all but a handful of retailers are reported, there were definite signs of that second half slowdown, which has continued into the current year (as JB Hi-Fi pointed out).

Only Harvey Norman (by the end of this month, that is next Wednesday) and David Jones and Myer (next month), are to report.

The trio are not expected to report upbeat profits or outlook, having suffered at the hands of rising consumer saving, the higher dollar and the fall in consumer confidence.