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Woolies booming; stand by for a rate rise

The country’s biggest retailer, Woolworths, has shown why 2007 was a boom year for it and most of its competitors with a 28% rise in first half profit and a 25% boost to dividend. Not the sort of news you want headlining a week out from a Reserve Bank board meeting that will consider another interest rate rise.

Bunnings produced a 20% rise in the Wesfarmers’ results last Friday, while JB Hi-Fi produced a 60% profit rise and said it expected more of the same this half. And Friday sees Harvey Norman report and it has already signalled that it is expecting earnings to rise by up to 35% for the half year.

Retailing, ie. consumption, is booming and that will only increase the angst at Martin Place, so stand by for a rate rise next Tuesday afternoon.

Woolworths said net profit was $891.3 million in the six months ended 30 December up from $695.6 million in the December half of 2006. The 28% rise in earnings was on an 8.6% rise in sales, so Woolies has managed to fatten its profit margins at a time when inflation is rising.

The company said its so-called EBIT margin, the ration of earnings before interest and tax to sales, rose a huge 0.53% to 5.73%, or 5.73 cents in every dollar of sales. That means every time you buy a litre of milk or a loaf of bread from a Woolies supermarket you can work out roughly how much money they will make by multiplying the price by 5.73% (it’s an average across the business).

Of that 0.53% rise (a very large increase in profit margin for a high volume business like supermarket retailing), the cost of doing business fell 0.14%, so Woolies lifted its basic profit margin by 0.39% in the half, a major achievement and one which shows just how poor the competition has been.

Coles management really stuffed up and deserved to be taken over by Wesfarmers. They might be able to do better, Wesfarmers’ key retailing business, Bunnings, lifted its EBIT by $55 million in the six months to December, a rise of of more than 20%.

But Woolies doesn’t expect any slackening in its earnings surge. Directors said they again expect profits to rise faster than sales this half. Supermarket sales rose 7.6% in the December half, supermarkets profits rose 18.6% and it was a similar story across the business.

We expect overall group sales to grow in the range of 8% to 10%. We also expect that EBIT will continue to grow faster than sales in FY08. Net profit after tax for FY08 is expected to grow in the range of 19% to 23%. In stating this guidance it should be noted that the second half profit includes investment costs associated with several key strategic growth initiatives outlined in this profit release,” directors said.

There’s one move there that will cause controversy: the Everyday Rewards Program, which will see the current “shopper dockets” for fuel replaced by a card, is a way of locking in customers more tightly to the retailer. The amount of information on the card and how it’s used could be a potential privacy problem because all you need now to get the fuel discount is a docket.

Depending on the information there will be a trail of spending at Woolies and its various bits and at the Caltex and Woolies petrol stations.

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    Ian Scandrett
    Posted Tuesday, 26 February 2008 at 6:56 pm | Permalink

    This move confirm a recent lift in redemptions due to docket sharing. A fuel card will lock this in tighter but will upset those who share dockets around the family. ACCC arguing for a new independent wholesale supply source adds to it.

    Ian Scandrett

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