Results: Woolies Confirms Weak Interim, Lifts Dividend

As expected, Woolworths (ASX: WOW)' interim profit was hit by the $300 million charge to cover the cost of restructuring and selling the Dick Smith chain of consumer electrical stores, but the trading result wasn't too hot either.

The results also confirmed that, as expected, the profit (and sales) growth in supermarkets and mid-market department store retailing is now firmly with Coles which is growing both at a faster rate than Woolies can currently manage.

Excluding one-off charges, Woolworths' profit totalled $1.184 billion, up 3.2% from the $1.162 billion in the first six months to 2010-11.

Including the charge, after tax profit was down 17% to $966.9 million, $10 million better than the market forecast for a result around $956 million.

For the half, Woolies' revenue rose 5% to $29.9 billion, as revealed with the release of the sales figures last month.

Woolies directors said it expect trading will remain subdued for the rest of its financial year and they reaffirmed the previous forecast for full year profit growth of 2% to 6%.

Despite that caution, the company lifted the interim dividend 2c to 59 cents a share, which is a sign of some confidence.

Woolies shares rose 4c yesterday to $25.35, hardly a ringing endorsement of the result.

But in a market that was off more than half a per cent and looking rudderless, it was an OK effort.

Food and liquor earnings rose 6.3%, while earnings at Big W fell 4.3% and were down 2.5% at Dick Smith.

Compared to rival Coles, the Woolies performance result was average.

Woolies lifted its trading EBIT (earnings before interest and tax) from continuing operations 3.3% to $1.825 billion.

Coles EBIT was up more than 10% to over $1.5 billion, so Woolies is clearly bigger in absolute profit terms, they are growing more slowly than Coles earnings are.

Wesfarmers (ASX: WES) reported last month that for the December half year Coles lifted earnings before interest and tax (EBIT, the best profit measure for retailers) 14.1% to $656 million while Bunnings posted a 6.1% increase in pre-tax earnings to $485 million: that's a total of $1.141 billion.

The other retail businesses had a mixed performance with Target reporting a 9.7% fall in EBIT to $186 million.

Officeworks improved, earning $34 million, up 9.1% for the half and despite severe price deflation on electronics and computer products.

But Kmart said its EBIT jumped 12.6% to a record $197 million as the turnaround wrought by former McDonald's boss, Guy Russo grows.

Kmart said its EBIT to sales margin, a key measure of retailing performance and profitability, rose to a solid 8.6% for the half year.

Gross margin (EBIT) as a percentage of sales for continuing operations was up 15 basis points (0.15%), helped partly by a shift to home brand or "private-label" products.

That helped offset a 3.7 % fall in food and liquor prices, led by weakening prices for fresh fruit and vegetables.

Retail EBIT margin (that is earnings before interest and tax as a percentage of sales) in the vital supermarkets and liquor business rose to 6.79 cents in the dollar, just three cents higher than in the same period of 2010-11 and one of the smallest increases in this vital measure of profits for some years.

It was struck on a 1.5% rise in comparable store sales for the division, which remains the group's sales and earnings heartland.

Woolworths said it continued to plan for future growth through expansion into the $40 billion home improvement market with its Masters business where it is aiming at Bunnings.

Start-up costs for Masters in the full year are expected to be up to $100 million before tax.

Those costs would be dependent on a range of factors, particularly the pace of the roll out of new stores, Woolworths said.

During the six months to January 1 Woolworths said it served an additional 26.9 million customers from the previous corresponding period, a 3.8% increase.

Supermarkets achieved volume and market share growth, while general merchandise was affected by deflation in key categories, Woolworths said.

"We have continued to reinvest in lower prices, delivering greater value to customers," it said.

The hotels business achieved sales growth with strong sales across both food and bar offerings, the company said.

Australian food and liquor sales for the half year were $19.6 billion, an increase of $800 million, or 4.3%, on the previous corresponding period.

Woolworths opened 25 Australian supermarkets during the first half, bringing the total to 864. Another 14 will be opened this half.

Comment: unlike the bleatings of Harvey Norman's Gerry Harvey on Wednesday in the wake of his company's very weak interim result and dividend cut, the Woolies report was far more positive.

In fact Woolies is far more confident of its future than is Harvey Norman. Woolies has decided to get out of consumer electronics and took the cost on the chin (and could get some back if it manages to get a decent sales price).

Dividend was lifted because the company sees sales and earnings growth in the rest of the year, unlike Harvey Norman.

Yes, the two retailers sell different products, but it all comes down to attitude and execution: Woolies has moved to reposition itself to try and ride out the current slowdown in its markets, Harvey Norman is a good year to 18 months behind.

The big question for Woolies is whether the $15 billion being poured into the Master's hardware chain will pay off, or whether it will turn out to generate weak to moderate returns.

At the same time Woolies management has to find a way of wresting back momentum from Coles and its various chains, or hoping the economy suddenly gets a growth spurt.

That won't happen, the straitjacket that is the high Aussie dollar will ensure the economy continues in much of the same vein for the next year or more.

That's one for the future.