Woolworths swings back to profit but cuts dividends and warns of profit pressure

Woolworths swung back to profit after shedding assets, slashing costs and prices to lure back customers, as part of a multi-year turnaround plan. Earnings from continuing operations fell though as food margins dropped and the company slashed its dividends.

Net profit for the first half came in at $725.3 million compared with a loss of $972.7 million, a year earlier when the retailer took writedowns in its now discontinued hardware business. Profit from continuing operations dropped 16.7% to $785.7 million as price cut and competition ate into margins. The retailer flagged the second half of the year could be similar with continued investment, higher depreciation, incentives and competition.

It cut its dividends to 34 cents a share from 44 cents a year earlier. Australian food margins fell to 4.3% due to the price cuts. That was the lowest since 2004.

Australian food comparable same store sales rose 1.9% in the first half and 3.1% in the second quarter, the supermarket chain said. That was enough to beat rival Coles 1.3% gain in the the first half for the first time in seven years.

Australia’s largest supermarket chain is emerging from a bruising 2016 when it reported its maiden loss since listing in 1993. Banducci has rushed through an overhaul racking up one-time charges and price cuts as part of his plan to revive the firm. The full benefits of the turnaround will be felt as soon in 2018.

“Particularly pleasing was the improvement in sales momentum in Australian Food, especially in the second quarter,” Banducci said. “This momentum gives us confidence that, while we still have a lot to do, we are on the right track.”

Profits rose at its New Zealand supermarkets business and liquor unit while it fell in Australian foods and Big W retail chain. Australian food business was impacted by the reinstatement of team incentive payments, higher depreciation and price cuts to lure back customers, it said. Big W, which sells clothing to cutlery to garden tools saw a fall in comparable store sales and the company took a a non-cash charge to reflect asset impairment and an increase in lease provision.

“We are currently reviewing the Big W strategic plan and this will be completed in the next few months,” Woolworths said without giving further details.

The company has exited its loss making hardware chain Masters and agreed a $1.8 billion sale of its fuel retailing business amid a refocus on its core food and liquor business.

“While we expect trading conditions to remain competitive for the remainder of the year , we are focused on building the sales momentum we have achieved over the last six months as we work to restore sustainable growth in Australian Food,” the supermarket chain said. “We note, however, that the second half will also be a period of continued investment in improving the store experience, depreciation from our renewal and IT investments and higher team incentive payments.”

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