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Woolworths, now the second-largest retailer in the southern hemisphere, is set to report interim results for the 26 weeks ending 27 December 2015.
Double-digit sales growth is expected to have been realised across most of the groups divisions (excluding General Merchandise).
Woolworths Food sales growth (+12.1%) is outpacing that of its local peers with recent reports showing Shoprite Holdings to have increased South African turnover by 7.2% in the six months ending December 2015, Spar by +8.4% in the 18 weeks to 30 January 2016 and Pick N Pay 8.5% in the 26 weeks to 30 August 2015. The food division has the added caveat of enjoying healthier operating margins than its peers.
The Woolworths Clothing and Country Road divisions combined contribute a similar amount of turnover (around 40%) for the group to that of the food division. These two divisions together are however more meaningful in terms of profit as they benefit from much stronger gross margins (for financial year 2015 Clothing 47.4% and Country Road 60.9% vs Food 25.7%).
David Jones revenue growth has been good over the period and investors may be encouraged that the group’s turnaround strategy for the relatively new acquisition might be gaining traction. The group’s increased size and improved purchasing power as well as the integration of house brands in David Jones (to replace some of the external brands) are among the key strategies to help improve margins and will be a focus for investors. Encouragingly, comparable sales growth for David Jones is now outpacing that of the general Australian apparel market.
Forward guidance, via a previously released trading statement, has indicated the following:
Around 40% of the group’s operating profit has historically (for the 2015 financial year) been attributable to operations in Australia and New Zealand (David Jones and Country Road). The offshore operations will have provided a favourable currency translation in the current reporting period.
Headline earnings per share are guided to be 25% to 35% higher than the comparative 26-week period. The Woolworths Group’s higher LSM target market provides the company with a more resilient clientele within the retail sector, in what is a deteriorated global economic outlook. The average broker rating as per 14 surveyed analysts by Thompsons Reuters is a buy.
*Shaun Murison is a market analyst at IG.
