Upbeat Woolies result tempered by Big W

Glenn Freeman | 30/08/2017

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Johannes Faul: What we're seeing right now in the short-term and the near-term is, Woolies doing outstandingly well to the detriment of calls which were its sales are slowing. Interestingly enough though, the pickup in sales at Woolworths hasn't really led to margin improvements over the last fiscal year.

So, margins in food were 4.4 per cent, down from the previous year, and we believe food margins in the long term will come off still a bit more and hover around the 4 per cent mark. And really our thinking around that is, yes, that's a long-term sustainable margin, profitability is there and it also compares with what Woolies' margins were way back over a few decades and also, where international grocers sit with their EBIT margin. So, that's our long-term thinking.

So, again, I think, for an investor it's pretty important to differentiate what's happening in the supermarkets business in the short-term versus the long-term because we really see a lot of competitive dynamics happening there.

So, again, Coles is slowing. Coles will, obviously, in our view, pick up the slack and do whatever they can in terms of investing in service and cutting prices to pick up their sales momentum.

Another thing that came out of the result was really a very weak BIG W. So, the market had expected a loss, but the loss was even greater than at least what we had expected. And FY18, so the current financial year, doesn't look to be any much better.

So, again, that raises questions around is that business really going to turn around, what Woolworths is going to do with that. So, again, BIG W likely to remain a drag on group earnings, but as supermarkets have done really well going out of the year and for the start of this year and Woolworth is probably going to lead in this current year over Coles. But again, we tend to focus on the long-term outlook at Morningstar.

This report appeared on www.morningstar.com.au 2017 Morningstar Australasia Pty Limited

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