Woolworths shares are tanking on a profit warning

Photo: Quinn Rooney/ Getty.

Sales at Woolworths supermarket have hit a wall.

The retailer today posted a rise of just 0.4% to $11.064 billion in first quarter food and liquor sales.

And it expects profit to fall to between $900 million to $1 billion in the first half of 2016, a 28% to 35% drop when compared to the same six months last year.

Woolworths shares dropped more than 8% in early trade to $25.085.

Outgoing CEO Grant O’Brien says 2016 is bearing the impact of significant investment in price, service and customer experience resulting in lower margins in Australian Supermarkets.

The company used up $100 million in the quarter to bring down prices an average 1.82%.

“We have chosen to accelerate this investment whilst also absorbing significant cost inflation in categories like meat and relaunching our Woolworths Rewards loyalty program,” he says.

The group had first quarter sales of $15.7 billion. Sales increased by 0.8% on the previous year excluding Petrol and decreased by 2.5% including Petrol.

The result is well behind Coles where food and liquor sales increased 4.7% to $7.631 billion in the September quarter.

The results from each of the Woolworths divisions. Petrol sales fell hard.

Supermarket sales at Woolworths show a drop when compared on a like for like basis, stripping out the impact of new stores. Australian Food and Liquor sales for the quarter were $11.1 billion, an increase of 0.4% on the previous year. Comparable store sales for the quarter decreased by 1%.

The supermarket sector in Australia is in upheaval with the arrival of low-cost global players Aldi and Costco starting to take market share from the established players in Coles and Woolworths.

The new entrants to the market have much more efficient operating models, using less floor space and less staff. According to Deutsche Bank, Aldi employs 24 staff per store in Australia compared to the 110-120 at Woolworths and Coles stores.

Sales at the Woolworths home improvement business, Masters, increased 23.5% for the quarter to $294 million with the opening of four new stores in the quarter. Masters has collective losses of about $600 million.

Woolworths is in the middle of a complete change in management after disappointing and below expectations results this year.

O’Brien is on his way out as CEO. He announced his retirement in June, citing the disappointing results at the supermarket group.

The job of finding a replacement sits with the new chairman, Gordon Cairns, who took over in August from Ralph Waters, who had been in the job for more than four years.

Here’s how the stock market reacted to the latest sales:

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