A trading update by retail giant Woolworths on Monday showed that its food division continues to be a star performer, growing sales by a remarkable 12% for the last six weeks of its half-year to December 27, 2020.
The six-week period is part of the festive season peak that includes Black Friday at the end of November and the December holidays.
While food sales boomed on the back of more people staying home and eating in due to Covid-19, the pandemic continued to impact sales in the group’s fashion, beauty and home division (FBH), as well as its David Jones business in Australia.
It said its food business “remained resilient” throughout the six-month/26-week period, with sales growing 10.9%. Comparable store sales grew 9.4%, while it still managed to grow new store space by 0.4%.
The division’s 12% growth in the last six weeks of its half-year saw it gain further market share.
While Covid-19 continues to affect in-stores sales, the pandemic has boosted online sales for major retailers, with the Woolworths food division reporting 158.5% growth in online sales for the six-month period.
However, this is off a comparatively low base, with online food sales now contributing 2.2% to overall sales.
The group has expanded its online and click-and-collect offering in the face of the pandemic-induced demand for such services over the past year. It began piloting its new Woolies Dash on-demand or same-day grocery delivery service in select locations just before Christmas.
Its FBH division saw sales declining 11.2% for the six-month period (comparable store sales down 11%, while sales at David Jones declined 8.8% largely driven by a lockdown in the state of Victoria in Australia).
The group however noted in its latest update that there was “improved trading momentum across all businesses over the final six weeks” of the half-year period. It did not provide divisional breakdowns for that period.
Overall group sales for the half-year increased by 5.3%, compared with the same period in 2019. Nevertheless, in “constant currency terms” sales declined by 0.5%.
“Trading conditions across the group continued to be impacted by Covid-19, with significantly reduced store footfall, particularly in larger shopping centres and CBD locations,” Woolworths noted.
“Considered actions to stimulate trade, strengthen online capabilities, manage inventory levels and execute property sales, have resulted in positive cash flows and a continued reduction in net debt levels in both South Africa and Australia,” it added.
On December 21, the group announced the sale of the David Jones Elizabeth Street property in Australia for around R5.6 billion. However, in its latest trading statement it points out that the sale will only be recognised in the second half of its financial year “once final approvals have been obtained”.
It noted that the sale is expected to “further strengthen the group’s balance sheet and ensure a more sustainable capital structure” of its Australian entities.
The stronger trading update saw the Woolworths’ share price surge almost 11% on Monday, closing at R44.72.
The group expects its half-year headline earnings per share (Heps) to increase by 50% to 60% when it releases its interim results on February 25.
While the better-than-expected trading performance has contributed to the increase in Heps, the biggest contribution seems to be coming from the sale of David Jones properties in Australia.
“The sale of the Bourke Street men’s property in David Jones was completed in the period, resulting in proceeds of Au$121 million [R1.4 billion] and a profit on sale of approximately A$23.5 million [R275 million].”
The group pointed out that Heps excludes the profit arising from the property sale, while adding that “the renegotiation of various David Jones leases resulted in lease modification and cancellation gains under IFRS 16 of approximately R667 million [pre-tax], which were recognised in the period”.
It said “adjusted diluted Heps” for the period is expected to be 17% to 22% higher. Adjusted diluted Heps calculations exclude both the Bourke Street sale and the lease modification gains cited above.
Commenting on the trading update, Alec Abraham, an equity analyst at Sasfin Wealth, said he expected the retailer’s food division to do well but “not necessarily to accelerate” the way it did for the period.
“I believe Woolworths Food is in a different league, with the most appealing offering [and] store shopping experience, convenient locations and increasingly improving price perception,” he added.
Abraham said he was surprised by the better performance of the group’s other divisions in the last six weeks of its half-year.
“I initially thought that would come at the cost of margin. While my Heps expectation is at the top of the guidance range, I would have thought more margin would have to have been sacrificed to get those sales,” he noted.
“The share price reaction is due to the surprisingly strong last six weeks’ performance.
“I’m still quite surprised at the better-than-expected sales updates from all the [retail] groups that have announced recently because macro drivers of retail spending [credit extension, employment, real wages] are still poor,” he added. “Granted, some of these numbers are out of date, but anecdotally, in theory, I don’t see how they could improve.”