Four worrying signs from Woolies’ positive sales results

Woolworths recorded surprisingly strong fourth-quarter sales yesterday, but rather than signifying a thaw in the retail environment there are some hidden warnings in the retailer’s $56.7 billion sales figures.

Woolworths chief executive Grant O’Brien said the company was pleased with its full-year sales figures, which showed a 4.75 increase.

”The last quarter in particular was a strong end to what was a challenging year,” he said.

Although the full-year sales are undoubtedly a strong result in what is a tough environment, Woolworths’ figures are likely to have been temporarily buoyed by new stores, increased deflation, and the Federal Government’s recent cash splash.

Here’s four reasons Woolworths’ sales figures are not quite as brilliant as they first appear:

1. The carbon tax and education rebate money played a part

The last-quarter uptick was strongest at Big W and its hotels, with Big W recording fourth quarter sales up 4.6% and fourth-quarter sales at the Woolworths hotel division rising 5.4%, with comparable sales up 1.2%, suggesting that carbon tax and education rebate money had flowed into the company’s clothing and pokies pockets since May.

”The place where we can most clearly identify the amount of that assistance money being spent in our stores is Big W and we have seen families spending, particularly on winter apparel,” O’Brien said.

Russell Zimmerman, chairman of the Australian Retailers Association, told SmartCompany the flow-on effect from the carbon tax and education rebate money was similar to that experienced after the stimulus package but warned these boosts were only temporary.

“I think particularly the bigger stores have benefitted and will benefit from that and hopefully it will flow down to smaller retailers,” he said.

“Obviously, when you get to this time next year, you have a bigger challenge in 12 months’ time if you try to rebuild those figures. But, on the other side of the coin, retailers are not going to object to those figures because it is going to help those sales in the long term.”

2. New stores boost performance in the short term

New Masters building supply stores, which recorded growth of 25%, are likely to have provided a temporary leg up to Woolworths’ growth figures, according to David Gordon of WHK.

Given the limited penetration even of Bunnings into the hardware and home improvement space, it could keep growing at that pace for years. The Masters figures, however, could have skewed overall figures for Woolworths, Gordon says.

“The most important component of retail sales growth is like-for-like sales because new stores tend to provide a short-term view on performance,” he says.

3. Struggling electronics group Dick Smith is still to be sold

Woolworths is expected to reveal as early as next month the multibillion-dollar sale of Dick Smith, but a buyer is yet to be found for the struggling electronics group.

Gordon says the “natural bias” for a buyer would be to trade contenders such as Harvey Norman.

The problem is that Harvey Norman was hurt by its purchase of Clive Peeters and has recently bought Retravision.

“The other logical buyers would be potentially some of the private equity firms, but you would doubt there would be great appetite unless there is a great deal,” he says.

“Overall, it is definitely not the optimum time to sell.”

4. Price deflation continues

Price deflation is continuing at Woolworths as a result of increased competition and the increased market share of private label products, which are at a lower price point.

“The private label share of market has a ceiling and most likely that is due to lower prices potentially leading to lower margin dollars,” says Gordon.

“It might be a higher margin percentage but because of the lower price the margin dollars are lower, so retailers are looking at this equation and balancing up where the most optimal margin mix is with regards to private label versus national brands.

“Private label, if anything, is buying them market share. But is that market share converting into margin?”

Brian Walker, of the Retail Doctor Group, told Smart Company the “well-documented price war” between Coles and Woolworths was leading to a short-term perspective for both retailers.

“Woolworths’ results are very pleasing but their number one challenge is to keep ahead of their competitors, so their results are very short term,” he warns.

“They have a far stronger competitor now than they did three or four years ago, which makes the pricing sharper and is better for consumers.”

 

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