NZ sales may hurt Woolworths profit

Woolworths may still suffer a New Zealand backlash. Photo by Reuters.
Woolworths may still suffer a New Zealand backlash. Photo by Reuters.
Woolworths, which is facing an investigation by the Commerce Commission in New Zealand, is expecting a reduced full-year profit.

Craigs Investment Partners broker Chris Timms said the first-half result, released yesterday, was solid without a lot of ''wow factor''.

The group reported underlying earnings of $A2.05 billion ($NZ2.18 billion) for the six months ending December, up 5.9% on the previous corresponding period. Reported profit of $A1.32 billion missed expectations and consensus figures due to higher tax and larger-than-expected interest expense.

The key food and liquor businesses again achieved better-than-expected margin expansion, he said.

''Earnings before interest and tax growth from the division is still well below the levels seen in the good old days but it is the best it has been in a while.

"We expect the more discretionary businesses to remain a drag but momentum from food and liquor should continue to build as recently opened stores mature.

"We believe that should underpin share price performance given it accounts for the lion's share of earnings.''

Craigs had reduced Woolworth's reported full-year profit forecast by 1.1% to $A2.45 billion.

The forecast profit for the New Zealand supermarkets, which include Countdown, had been reduced by 5% to $A260 million.

Mr Timms said it was too early to say whether the downgrade would be extended further, following allegations by Labour MP Shane Jones regarding pressure being put on Countdown suppliers to backdate payments to the supermarket chain.

''But they could. First, we had the pressure being placed on New Zealand suppliers through their products being taken off Australian supermarket shelves. Then we had the claims by the Labour MP regarding the payments and the pressure being put on the suppliers.

''It will come down to dollars and cents. If there is any sign Countdown is being blacklisted by consumers, they will discount prices to get them back. That will hit Woolworths' margins.''

Grocery markets were ''very competitive'' and if Foodstuffs, the operator of New World and Pak'n Save brands, saw an advantage it would take it, Mr Timms said.

Morningstar analyst Tim Montague-Jones said from Sydney Woolworths was taking the fight to a resurgent competitive Coles with comparable sales adjusted for deflation up 7.1%.

That was ahead of Coles and reflected the focus on promotional activity, with the company reinvesting $A400 million in price discounts to attract higher sales volumes.

Big W was in a process of reorganisation as Woolworths aimed to redirect the long-term strategy of the brand towards becoming Australian's leading multi-platform discretionary retailer.

The purchase of New Zealand's leading e-commerce company, EziBuy, offered a strategic fit to accelerate the transformation of the business, he said.

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