There are glimpses of a Woolworths turnaround ahead of its half year results

Photo: Marianna Massey/ Getty Images for Woolworths.

Woolworths is expected to ease back to profit when it reports its half year results on Wednesday as the supermarket chain shed assets, cuts jobs as part of a multi-year turnaround plan.

Analysts see the company posting a profit of about $870 million for the six months to the end of December.

Woolworths in August reported its first full year loss of $1.23 billion, as the retailer exited the hardware industry, restructured and started to rebuild its supermarket business.

Total revenue is seen dropping 1% to $31.6 billion and operating profit slipping 8% to about $1.5 billion driven by margin pressure at its food and liquor business due to price cuts and weakness in Big W retail chain.

Brad Banducci, who took over as CEO a year ago, has rushed through an overhaul racking up one-time charges and price cuts as part of his plan to revive the firm. Early signs of the plan were positive with the company saying in October it had managed to lift underlying sales for the first time in almost a year.

The full benefits of the turnaround will be felt as soon in 2018, Woolworths has said.

However, analysts warned against jumping to conclusion with competition only set to rise.

“Much will depend on the competitive landscape over the next few years with press speculation of Amazon Fresh and Lidl potentially entering the Australian market,” Alexander Lu and Josephine Little, analysts at Morgans said. “With the competitive landscape likely to get more intense, risks to margins remain to the downside.”

Here are four things to look for in the earnings.

1. Competition:

Main competitor Coles posted a 1.3% growth in comparable same store sales in the six months ended December 31. Woolworths is tipped to sneak past that number and if does it will be the first beat in more than seven years and it will also be an endorsement of the strategy to lure back customers with price cuts. First quarter sales for the business climbed 0.9%, which was the first positive result since 2015 and investors will be keenly watching if the momentum continues.

This chart by UBS shows Woolworths comparable store sales improvement

2. Margin pressure:

Margins are expected to continue to slide as the company is expected to keep prices lower to face competition from Coles, Aldi and wholesaler Costco. Woolworths operating profit margins are forecast to fall to 4.6% in the first half, Morgans analysts said. That compares with a 5.1% margin a year earlier and 6.8% in 2018.

And this chart shows falling margins

3. Big W:

Big W slumped to a $15 million loss last year after its was forced to discount and its winter fashion did not appeal to customers. Leadership changes haven’t helped either with the resignation of CEO Sally Macdonald in November after only 10 months in the role. With the business continuing to lag, questions are being asked on whether it will be the next business to be axed. Woolworths closed its loss making hardware business and agreed to sell its fuel retailing unit for $1.8 billion. No decision will be made on Big W until its performance has improved, chairman Gordon Cairns said at the annual shareholders meeting in November. That may result in several years of under performance and minuscule profits, based on projections by UBS.

4. Cost cut opportunity:

UBS analysts Ben Gilbert, Aryan Norozi and Apoorv Sehgal said Woolworths will have the opportunity to cut costs that will add about $330 million to operating profit next year as the reduced the range of products, cuts staff and reduces store expenses. Investors will be looking for any commentary on the outlook for costs.

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