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Woolworths Reports $927.7 Million Loss for 1H16

Woolworths Reports $927.7 Million Loss for 1H16
Sales declined 1.4% due to lower trading results in Australian Food and General Merchandise sections
Feb 26, 2016 By Simon Herrmann Tags: WOW

Woolworths Limited (ASX:WOW) released financial results for the first half of FY16 showing statutory net loss pf $972.7 million.

Underlying EBIT down 31.6%

The retail giant reported a net profit before significant items of $925.8 million for 1H16, which remained within the guidance range provided in October 2015.

Sales for the period declined 1.4% due to lower trading in Australian Food and General Merchandise combined with the impact of no longer recognising sales from the 131 Woolworths-Caltex operated sites. However, if the Petrol segment was excluded, sales rose 1.2% on the prior half year.

Gross profit as a percentage of sales declined 31 bps (basis points) on the previous year to 26.9% as a significant price investment in local supermarkets during the period was partially offset by the change in sales mix from Petrol department to our higher margin businesses.

Cost of doing business (CODB) as a percentage of sales rose 171 bps to 22.4% due to passive sales growth, primarily in the local supermarkets, restraining the retailer’s ability to reduce costs combined with the incremental investment in store labour.

However, this was partially offset by cost savings generated through improved efficiency across non-trade procurement and support functions.

The aforementioned factors led to a drop in EBIT (excluding significant items) by 31.6% on 1H15 to $1.46 billion.

Capital Management

The significant items refer to impairment charges on the Home Improvement assets, write-down on other inventories and store exit costs.

Woolworths aims to undertake a number of initiatives to support its current credit profile, including the sale of non-core assets, accelerating working capital incentives and adjusting its growth capital expenditure and property leasing profile.

Net financing costs were lowered by 7.2%, driven by interest savings on lower debt.

The board approved an interim dividend of 44cents per share, which is 34.3% lower than last year’s interim distribution. 

The retailer stated that there will be no impact on cash flow from the potential wind-up of its Home Improvement business. Any short term cash requirements for restructuring of the Home Improvement business will be funded via existing undrawn debt facilities.

Appointment of New CEO

Woolworths also announced the appointment of Mr. Brad Banducci as the new CEO and Managing Director of the group, effective immediately. Mr Banducci was previously the Managing Director of Woolworth Food Group.

He commented on the challenges faced by the group: “Our investment across all aspects of the customer experience during the half resulted in increased customer numbers, improved Voice of the Customer shopping scores and comparable store transaction growth. However, trading remains competitive and there is much to do. The implementation of our new retail merchandising system has proven challenging and our underlying IT infrastructure.”

Outlook

For FY16, Woolworths expects to achieve EBIT margin in Australian Food, Liquor and Petrol to be approximately 5%, reflecting a seasonally lower margin in H216.

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Simon Herrmann Author: Simon Herrmann Feb 26, 2016

Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.

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