In the face of some of the toughest retail conditions, the outgoing boss of Woolworths Michael Luscombe has managed to pull a rabbit out of his hat and not just meet sales and profit guidance for the full year but produce a better-than-expected fourth-quarter sales result.
In his penultimate briefing before he retires, Luscombe produced fourth-quarter sales growth of 4.2 per cent, but warned that the next 12 months would be tough for retailers.
“We should be under no illusions that the year ahead will be tough,” he said. “The next year won't be a walk in the park. It will sort the girls out from the women and the boys from the men,” he warned.
It was a similar message echoed last week by David Jones chief executive, who downgraded full-year results, Luscombe warned that consumer electronics was the harshest segment and it would be survival of the fittest.
And it came as the Commonwealth Bank Business Sales Indicator (BSI) – a key measure of economy-wide spending – fell by 0.3 per cent in trend terms in June, with the weakness concentrated in retail stores and cars. The gauge shows a sharp deterioration in the retail sector over the past two months.
The lack of appetite for consumer spending was epitomised in Luscombe's comments that Woolworths had increased volume in consumer electronics but sales revenue was down 4.1 per cent in Australia in the fourth quarter, and down 2.1 per cent on comparative store sales. Quake-hit New Zealand was worse, with sales down 6.8 per cent in the fourth quarter.
For instance, television prices had fallen 26 per cent, while computer prices had been slashed 30.2 per cent in the fourth quarter.
Guidance intact
Despite this general gloom, Luscombe confirmed he will leave the company meeting full-year profit guidance.
While the quality of the results won't be apparent until the group releases its profit results next month, along with a breakdown of capital expenditure and profit margins in the various divisions, at first glance it looks like a good result in the circumstances.
Full-year sales came in at $54 billion, up 4.7 per cent on the previous year, and up 4.1 per cent excluding petrol. It comes as arch competitor Coles has had burst onto the scenes in the past year with effective price cutting that is building momentum.
And as Coles continues to cut prices, Luscombe confirmed there would be more products put in the “knock down” category, as competition with Coles intensifies. Average prices in the food and liquor division experienced price deflation of 3.1 per cent for the second half of the year.
If the competitive momentum flows much further into the political arena, and catches the radar of the incoming boss of the ACCC, it could cause both juggernauts a big headache as they seek to slug it out and spread their tentacles even further into most aspects of consumers' spending.
Many suppliers and small businesses complain that they are being squeezed and are under direct threat from such practices. Few will publicly criticise Coles and Woolworths because they fear retribution or hope one of the chains will buy them out.
What is known is that Woolworths announced its first profit downgrade in 20 years earlier this year after a trend of slowing sales growth for the past two years. What is also known is that the first-half results show that Coles's growth in sales in absolute dollar terms was $776 million, compared with $629 million for Woolworths, even though the latter has 20 per cent more trading space.
Woolworths' food and liquor sales rose 6 per cent in the fourth quarter, compared with a 2.8 per cent rise in the previous corresponding period. On a comparable store basis, the rate of growth in sales was up 4 per cent. Sales for Big W were up 5 per cent in the fourth quarter, but down 0.8 per cent for the year, and hotels were up 4.9 per cent for the fourth quarter and up 4.6 per cent for the year.
Of course, time will tell what happens but price discounting tactics by Coles and a change in leadership at Woolworths next month have increased uncertainty over profit growth in food and liquor retailing.
aferguson@fairfaxmedia.com.au