Woolworths sold lower volumes of food and clothing in its half-year to Christmas, with the company highlighting consumer weakness, delays at the ports, load-shedding and bird flu — which may have led to higher chicken prices.
The weaker sales mean headline earnings per share (HEPS) from continuing operations, a main profit measure, will drop by 5%-10% year on year.
Analysts and investors keenly await the early 2023 retail updates, which indicate sales over the festive season, when retailers make their highest percentage of sales.
With consumers struggling to make ends meet, it is possible that Woolworths is not alone and quite a few fashion retailers could report lower sales compared with the same period in 2022.
It seems there may be a few disappointing updates, suggested equity analyst at M&G Investments Damon Buss.
“Our view is that consumer spend will be relatively weak, due to the rapidity of the interest rate hikes and persistently high inflation, hence the trading updates due over the next few weeks are likely to disappoint.”
Buss said information that the firm had gleaned from landlords and others suggests retailers experienced a weak November and better December sales.
Woolworths’ trading update showed the volumes of clothing and homeware it sold in the 26 weeks to December fell about 10%, probably because of cash-strapped consumers cutting back and increased competition.
Like-for-like clothing sales grew 1.5%, with average price inflation at 11.4%.
While volumes dropped, the business reported more full-price sales and fewer promotions, which means it could be making more profit per item of clothing.
Buss said: “Woolworths has been focused on driving full-price sales, hence the high price inflation. We think it is the right decision to focus on profitable sales, rather than just chasing top-line growth.”
Sasfin analyst Alec Abraham said that despite the lower volumes, he expected the Woolworths fashion and home division to have better profitability because of internal improvements. “The group has almost doubled the profit margin in fashion since the financial year of 2020, albeit still off its peak.”
The AVI consumer group, which owns the Kurt Geiger, Lacoste and Gant clothing brands, reported on Monday that it sold lower apparel volumes in its half year to December, suggesting consumers do not have as much money to spend on upmarket fashion.
Woolworths also said delays at the ports meant its summer stock arrived late, impairing sales. However, it had told Business Day in November that it foresaw “a minimal impact” on Black Friday and Christmas, which it described as “key trading periods for us this festive season”.
The Woolworths food business, which is its star performer, saw sales increase by 8.4% and same-store sales grow 7.2%. This was below price increases of 9.1%, indicating slightly lower sales volumes.
Woolworths reported volume growth in food sales in the six weeks in the run-up to Christmas.
Asked if Checkers is denting Woolworths’ food sales, Abraham said: “Yes, but not because they are better than Woolworths. Checkers is far better represented in higher-income areas than before, and this is important because grocery shopping is very much about convenience.
“Checkers is doing a great marketing job and leaning into the perception that they are cheap, and enjoying the great visibility that the successful Sixty60 army of bikes affords them. These create an overwhelming public impression that the group is taking over the market.”
Anecdotally, he said, Woolworths’ basic food items offer value for money, something that customers fail to appreciate.
Woolworths also faced a weak economic environment in Australia where higher interest rates dampened spending. “The retail industry has been disproportionately impacted by the shift in spending away from goods to services. Country Road sales for the current period declined by 5.% and by 9.5% in comparable stores,” it said.
However, it saw an improvement in the six weeks before Christmas, showing sales growth of 1.3%.
Abraham said these figures must be viewed against high sales at the end of 2022 when Australian consumers were spending a lot on fashion following stringent lockdowns.
The share price closed 2.77% lower at R64.69 after the discouraging update.
Both Buss and Abraham expect Woolworths to report a better financial second half to end-June.
Abraham said, however, sales volumes may decline further as consumers are still under so much pressure.
Woolworths’ online food sales now account for just more than 5% of grocery sales and online clothing sales account for 5.4% of fashion sold.
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