Business Reporter.
Woolworths has increased its first-half earnings by more than half and nearly doubled its interim shareholder payout, with a sharp rebound in Australia helping to offset load shedding in SA, which is costing it R15 million per month in lost profits.
While load shedding’s total impact on adjusted operating profit for the period came in at about R90 million, strong results from Australia saw a surge in sales off a low base due to Covid-19 lockdowns in the previous reporting period. This helped lift headline earnings 70% to R2.74 billion for its six months to 25 December.
According to the group, the energy crisis has been devastating and has had a pronounced impact on the broader South African economy and business confidence.
“The majority of this incurred in our predominantly fresh Food business, as a result of increased waste and diesel costs in both our supply chain and stores,” Woolworths said.
“Given the erratic and unpredictable nature of load shedding, we are focused on developing a longer-term business solution to sustainably mitigate both upstream and downstream impacts to this challenge. This includes the impacts on our suppliers, and particularly those where the costs required to manage the breakdown in infrastructure have become prohibitive.”
Woolworths said that while it is focused on minimising both the operational and financial impacts of load shedding, its primary objective is to protect the quality and integrity of its ‘cold chain’, and the trust customers place in its brand.
“We have made significant past investments in our energy supply capabilities, with 99% of our stores and all our distribution centres already equipped with generator capacity. Furthermore, the majority of our suppliers are exclusive to our Food business, with these partnerships, in many instances, spanning decades.
“This places us in a favourable position to build a holistic, integrated and fully resilient response plan from here,” it said.
Financial highlights
Despite the cost of load shedding, Woolworths reported a huge jump in profits for the period, up 70%.
- Turnover was up 15.0% to R45.1 billion
- Profit before tax was up 63.3% to R3.7 billion
- Total profit for the period was up 70% to R2.7 billion
- Headline earnings per share were up 75.1% to 294.5cps
- Interim dividend per share was up 96.9% to 158.5cps (2021: 80.5cps)
Food business
Over the six-month period, Woolworths’ Food business grew turnover and concession sales by 7.6% and by 5.4% on a comparable store basis, with sales growth accelerating to 8.6% in the last six weeks of the period, despite the disruption of load shedding.
Price movement increased to 6.8% for the period, being below underlying product inflation of 8.4%. This was due to continued price investment, with the group looking to keep its overall customer value proposition.
Space grew by 2.5% relative to the prior period. Online sales increased by 22.7%, now accounting for 3.6% of South African sales, as the group continues to expand its on-demand offering, Woolies Dash.
However, the gross profit margin decreased by 30bps to 23.8%, due to the impact of load shedding on waste and supply chain costs, the continued shift to online, and the ongoing investment in price.
“Additional diesel costs, coupled with higher cost inflation, resulted in expense growth of 8.5% on last year. Adjusted operating profit grew by 0.2% to R1 412 million, returning an operating profit margin of 6.7% for the current period, compared to 7.2% in the prior period,” it said.
Excluding the impact of load shedding, adjusted operating profit growth on the prior period was 490bps higher, at 5.1%, with operating margin 30bps higher, at 7.0%.
Other business
Woolworths said its Fashion Beauty Home turnaround strategy continued to gain traction over the period, with turnover and concession sales growing by 11.2%, and by 11.0% on a comparable store basis, and strengthened to 12.0% in the last six weeks of the period.
“Price movement of 10.8% remained positively impacted by the ongoing focus on full-price sales and the continued reduction in markdowns. Trading space was further reduced by 2.2% over the prior period. Online sales grew by 4.5% and contributed 4.2% of South African sales,” it said.
Excluding the impact of load shedding, adjusted operating profit growth on the prior period was 290bps higher, at 28.4%, with an operating margin 30bps higher, at 13.4%.
The Woolworths Financial Services book reflects a year-on-year increase of 17.2% to the end of December 2022, driven by consumer spending, as well as new accounts and credit card advances.
The annualised impairment rate for the six months ended 31 December 2022 was 5.5%, compared to 4.0% in the prior period, due to the growth in new business, the group said.
The group said it is proceeding with its disposal of David Jones, reported as a discontinued operation in its results. Woolworths previously said the disposal of David Jones would remove R17 billion in liabilities from its balance sheet and improve the company’s solvency.
Woolworths did not disclose how much it would get for David Jones. It only said the deal is expected to be concluded by the end of March.
Outlook
Given the persistence of load shedding and headwinds through higher inflation and interest rates, Woolworths said the trading environment over the second half of the year will remain challenging.
“An imminent resolution to the debilitating power crisis and stimulus for economic growth appears remote. These factors, coupled with a higher comparative base effect, are likely to result in slower profit growth in the current half, relative to the first half,” it said.
Looking beyond the 2023 financial year, Woolworths said that there are many self-driven opportunities in the execution of its various strategies to strengthen and simplify the group’s offerings.
“Post the David Jones disposal, we are well positioned to invest even greater management time and financial resources in our remaining businesses, to the benefit of all stakeholders,” it said.