Woolworths hits $1.6b profit despite higher prices and changing buying habits

Supply-driven inflation and a return to more normalised shopping habits, including weekend and evening sales, have been large contributors to a 4.6% rise in full-year profits for Woolworths Group (ASX: WOW).

Australia’s largest grocery chain today announced an annual net profit after tax from continuing operations of $1.62 billion compared with $1.55 billion a year earlier.

It also confirmed a final dividend of $0.58 per share, compared to last year’s $0.53 declaration.

Higher sales, an improved “operating rhythm”, the absence of pandemic-associated costs and the benefits of ongoing investment in recent years led to an EBIT (earnings before interest and taxation) growth of 15.8% for the year, representing a four-year compound annual growth rate (4yr CAGR) of 7.4%.

Excluding direct pandemic costs incurred in the prior year of $323 million, the group’s EBIT increased by 3.4%.

Customer buying patterns

Woolworths chief executive officer Brad Banducci said changes to customer buying habits had largely shaped the group’s 2023 financials.

“While our customer scores were largely stable over the year, they were below our aspirations and impacted by ongoing supply chain disruptions, market-wide supply driven inflation and the impact of customers returning to shopping more on weekends and evenings,” he said.

“Looking ahead to 2024, we expect food inflation in Australia and New Zealand will continue to moderate but remain elevated in some packaged categories [and] the consumer environment to remain challenging with customers continuing to cut back on non-essential items.”

Overall outlook

Mr Banducci said the group remained committed to improving the overall retail outlook.

“We will be investing in our customers to deliver increased value and convenience; in our teams to help them manage their own cost-of-living pressures; and in our platforms including our store network and supply chains to create a better, safer and more sustainable future,” he said.

“We are committed to building a better business and we will continue to invest in the most important areas to drive growth, increase operating efficiency and improve our resilience… digital and analytics capabilities are only increasing in importance, and we will build on the strong foundations and momentum we have.”

Australian Food sales

In the group’s Australian Food business unit, total sales for the full year increased by 5%, with sales for the second half increasing by 7.6% (4yr CAGR 5.9%).

In the first half, sales growth was impacted by cycling higher growth in the prior year due to pandemic-related lockdowns, while second half sales growth reflected elevated inflation.

EBIT increased by 19.1% (4yr CAGR 8.4%) with EBIT for the second half increasing by 20.1%.

Excluding the material impact of direct pandemic costs in the prior year, EBIT for the full year increased by 9.5%.

Retail increase

Sales for Woolworths Food Retail division (which includes stores and online) increased by 4.8% (4yr CAGR 5.7%), with second half sales jumping 7.4% (4yr CAGR 5.8%).

Sales growth in the second half was driven by strong activity from Woolworths Supermarkets, Metro Food Stores and e-commerce transactions.

Woolworths Food Retail EBIT increased by 18.3% on the back of improved promotional effectiveness, category mix benefits, increased productivity and the absence of pandemic costs.

This helped to offset significant cost inflation primarily driven by wage increases and higher depreciation.

Metro Food growth

Metro Food Stores had a strong year with sales growth of 21.6% attributed to increased customer mobility, new store performances and enhancements to the group’s existing format.

Woolworths’ own-brand sales increased by 5.4%, reflecting increased purchases of more affordable essentials such as rice, pasta and drinks as well as value-added ranges such as Macro, COOK and BBQ.

The group said its home-branded products “play a key role” in providing value for customers with inflation materially below the overall store inflation for the full year and equivalent to approximately $50 million in additional annual investment.

Meanwhile, WooliesX (comprising e-commerce and other digital businesses) had a strong second half after a challenging start to the year, with full-year total sales increasing by 5.6% and DAP (directly-attributable profit) and EBIT up 23.1% on the prior year.

Express and same day delivery services continued to grow rapidly which helped drive an e-commerce sales increase of 13.2% in the second half after a 5.8% decline in the first six months.

Challenging year

For the group’s New Zealand Food division, a challenging year was reflected in an EBIT reduction of 21% on the previous period despite a 4.6% increase in sales and reduced pandemic-associated costs.

The lower EBIT was primarily due to a 12% increase in wages in mid-2022 to address cost-of-living pressures but there were also several external factors impacting the results including weather events and ongoing supply chain disruptions.

Stability improved in the second half with EBIT of $127 million marginally higher than first half figures of $122 million and up by 10.3% on the prior year.

Big W results

The trading environment for department store Big W changed dramatically during the reporting period with second half results coming in below expectations as customers cut back on discretionary spending and the sector became heavily competitive with higher levels of promotions and discounts.

While Big W’s full-year EBIT of $145 million was more than double the previous year’s figures, the second half EBIT of $11 million was lower due to flat sales, higher promotional activity across the market and rising unit costs driven by team wage investments.

The group said customer scores remained strong (including value for money metrics) and digital interactions continue to grow.