Woolies' Earnings Go Wow

The country's biggest retailer boosted sales by 12.6% to more than $42 billion yesterday, but earnings rose a faster 27% after tax to $1.294 billion.

And Woolies also expects its growth this year to be 'organic' (i.e. generated internally rather than by acquisition). And yes, it still would make a 'bolt on acquisition' which the bits of Coles it is interested in would be, such has been the way WOW has left its rival behind.But it is going to lift capital spending to around $1.3 billion to build new supermarkets, liquor stores, petrol outlets, BIG W stores and new electronics outlets.

What is clear is that whoever controls Coles at the end of 2007 (Wesfarmers or existing shareholders or someone else), WOW will dominate Australian retailing and be impossible to overtake.

The company is also approaching a decision on another major capital management program; such has been the improvement in its finances. Debt is down, cash flow is up, inventories under control, capital spending will rise in the coming year, and the company yesterday hinted that shareholders can expect news on capital changes during the year.

"In the absence of any further major acquisitions, Woolworths will consider undertaking some form of capital management in the 2008 calendar year," the company said.

Woolworths directors said in the profit statement that the company is well-positioned for future growth and that sales should grow by 7%-10% in this financial year.

They forecast that earnings after tax would rise between 19% and 23% this year, which would put the figure at around $1.59 billion. (2008 though will be a 53-week year which will provide a distortion.)

The Coles board is expecting to receive a report on the Wesfarmers offer from independent experts later this week.

Woolworths shares rose 50 cents to $28.19 yesterday after being ahead 68c in the morning after the result was released. It was the retailer's seventh straight annual gain in earnings and it's very confident it is heading for an eighth in 2008.

Woolworths topped its $1.28 billion forecast made last month when the fourth quarter and 2007 sales were released.

Second-half net profit rose 27% to $598 million.

The company's overall EBIT to Sales margin (that is, earnings before interest and tax) rose to 4.97 cents in the dollar and 4.65 cents in the dollar excluding its extensive hotels interests.

But in its heartland, its Australian supermarkets, the EBIT/Sales Margin jumped to 5.16c in the dollar from 4.49 cents in the dollar in 2006. That's an improvement of more than half a cent in every dollar of sales through the company's huge Australian supermarkets

That compares to Coles' most recent supermarket EBIT margin of 3.84 cents in the dollar.

Woolworths expanded its margins and sales by revamping its logistics chain from producer and importer to distribution centre and supermarkets. That has cut its annual cost of doing business by billions of dollars since 1999-2000.

Now it is growing margins by increasing the use of own brand products, many of which are imported.

Woolies has run into some controversy about the environmental sustainability of some of the paper tissues and other products imported from Indonesia. It pulled the tissues concerned from the market yesterday.

After tax sales rose 12.6% to $42,477 million; earnings before interest, taxation, depreciation and amortisation (EBITDA) rose 20.3% to $2,700.6 million; earnings before interest and taxation (EBIT) jumped 22.6% to $2,111.3 million and net operating profit after tax was up 27.5% to $1,294.0 million; earnings per share (EPS) were up 19.7% to 108.8 cents; final dividend per share was 39 cents to bring total for the year to 74 cents, up 25.4%.

"Overall, this has been a successful year, with pleasing results in all our businesses," Mr Luscombe said.

"The development of our supermarkets supply chain is now complete, with the opening of our largest distribution centre (DC) in Brisbane in March 2007.

"The systems that have driven our supply chain transformation are fully functioning and continue to be refined to deliver real productivity improved in stock positions and cost benefits to the business.

"We are now leveraging our systems and knowledge in logistics into other business areas including Liquor, BIG W and in time, New Zealand supermarket operations."

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Australian Supermarket division sales for the full year increased 9.2%, to $32.58 billion, of which Food and Liquor sales grew 9.0%, with comparable sales growing 6.6% during the year. Inflation levels declined over the year as we cycled the "banana effect". For the Australian Supermarkets division, EBIT grew faster than sales, increasing by 25.5% to $1.680 billion compared with sales growth of 9.2%. Australian Supermarkets EBIT margin increased 67 basis points to 5.16% (2006: 4.49%). Total liquor sales for the year were $4.1 billion (FY06: $3.5 billion),

Petrol sales for the full year were $4.8 billion, an increase of 10.2%, which was driven by solid increases in comparable volumes and continued rollout of new canopies. Average sell prices were lower than the previous year in the last three quarters of the year. During the year, petrol comparable sales increased by 5.0% and comparable volumes increased 4.8% (2006:1.3%). As at the end of the financial year, Woolworths had 505 petrol stations including 134 Woolworths/Caltex alliance sites. Petrol EBIT of $82.9 million reflects solid volume growth and EBIT margins improved from 1.2% to 1.7%.

Sales in New Zealand for the full-year were $3.9 billion and reported EBIT was $155.1 million. It was pleasing to see a return to normal operating levels, following the industrial action that occurred in the first quarter.

In Big W, EBIT grew faster than sales, increasing by 12.6% to $138.6 million, compared with sales growth of 11.1%, to $3.465 billion, with a pleasing second half result, supported by strong comparable sales (Year 3.4%, second half 7.3%).

Consumer Electronics reported a solid result all-round with the division reporting double digit growth in both revenue and earnings. Sales for the full-year reached $1,285 million (10.1% increase on last year) with Earnings Before Interest And Tax rising 11.1% to 71.1 million.

The business venture with TATA is still in its infancy, with 5 retail stores operating under the "Croma" brand. The stores are located in Mumbai and Ahmedabad. As part of this venture Woolworths Limited provides buying, wholesale, supply chain and general consulting services to TATA. The wholesale operations are meeting our expectations, and recorded sales of $25 million during the year and made an operating loss of $4.3 million reflecting the initial start up costs.

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