Woolworths reported total sales growth from continuing operations of 4.3% in the March quarter, versus our 3.6% forecast.
Australian food like-for-like (LFL) sales growth of 4.3% – adjusted for Easter and new year’s day – was above our forecast of 3.7%, while New Zealand supermarkets came in at 3.8% versus our 2.0% estimate, and Big W was worse than expected at -1.2% versus our 1.4% forecast. Endeavour Drinks and Hotels were in line with our estimates.
Our FY18 normalised EPS forecast remains largely unchanged, but we have raised our FY19 and FY20 estimates modestly. We maintain our Accumulate recommendation on Woolworths and have raised our target price to $31.00 from $29.00.
After examining the result we make the following observations:
The food turnaround continues with LFL sales growth remaining strong, which we believe will moderate with tough comparable numbers to cycle in 2018. However, we are confident that investing in the cost of doing business is a sound use of sales growth (providing operating leverage) and lower stock losses (enabling gross margin expansion), which should support further sales growth and sustain the turnaround. Woolworths is seeing its sales gap to Coles (WES, Hold) moderate from a peak of 540bp in fourth-quarter FY17 to 290bp now, but we expect Woolworths to lead Coles for the next couple of years.
The New Zealand supermarkets result followed efforts to improve performance in the business – notably an increase in team hours to provide better service, and investments in fruit and vegetable prices and online. While there is expected to be a negative impact on operating margins in FY18, the impact of these investments on sales is encouraging.
Big W’s LFL sales decline of 1.2% (adjusted for Easter) was disappointing following two quarters of positive LFL growth, and despite a weak -5.7% in the same period last year. The lower LFL sales growth was due to price investment, which boosted items per basket. Transaction growth declined 0.1% in third quarter, versus 1.5% in second quarter and 1.7% in the first quarter. Peak losses have been achieved and Big W is positioned well for a recovery in profit, in our view, although the industry backdrop is challenging.