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Woolworths’ share price dips as earnings margins squeezed
It’s been tough year for the giant supermarkets – just ask Woolworths (ASX:WOW) that has witnessed its share price dip 13.8 per cent over the past year while the bellwether S&P/ASX 200 index has increased 19.5 per cent over the same period.
While the most visible signs of the pressures on Woolworths’ share price have been of a regulatory and political nature fuelled by consumer angst over high prices during a cost-of-living crisis, they are far from the only reasons.
Woolworths’ e-commerce sales grew a staggering 23.6 per cent in the September 2024 quarter, pushing its e-commerce penetration to nearly 15 per cent. But these sales, while welcomed by consumers for the convenience factor, are less profitable.
In addition, a recent Goldman Sachs report found the US behemoth Amazon was running second to Woolworths as the largest online retail business in Australia – given some credence to claims by Woolworths (and Coles) that the perceived lack of competition in this market is overstated. Higher costs, such as labour, energy and rent, are also taking a toll on earnings. It’s also being hurt by industrial action in Victoria in the run-up to Christmas.
But it’s the growing anger of consumers and suppliers towards the two major supermarket chains – it’s been shamelessly exploited by politicians – that’s really hurting. For Woolworths, it means having to take concrete steps to rebuild customer trust via mechanisms such as discounts, and this comes at a cost to the bottom line.
Adding to these challenges, Woolworths is facing class action proceedings in the Federal Court. This case, initiated by Gerard Malouf & Partners, is linked to allegations under investigation by the Australian Competition and Consumer Commission (ACCC), with the regulator examining Woolworths’ treatment of suppliers and its pricing. It’s due to hand down its report on February 28, 2025.
Despite these headwinds, Woolworths reported a 4.5 per cent increase in sales for the first quarter for the 2024-25 financial year, reaching $18 billion, compared with $17.2 billion in the same period last year.
The retailer’s major divisions showed encouraging results in the quarter, with Australian food sales up 3.8 per cent to $13.6 billion, Australian B2B achieved a 6.9 per cent increase in sales to $1.5 billion, New Zealand food posted a 2.7 per cent sales increase in local currency and W Living enjoyed a 17 per cent jump in sales.
Woolworths’ ability to deliver sales growth during a challenging period is encouraging, but the strategy of prioritising value has come at the cost of slimmer margins, particularly in its food businesses, and that’s making investors nervy.
Despite the positive sales figures, Amanda Bardwell (pictured), who took the reins as chief executive officer on September 1, is forecasting first half 2024-25 earnings before interest and tax (EBIT) to fall to between $1.48 billion and $1.53 billion, down from $1.6 billion in the same period last year.
Contributing factors include $40 million in additional supply chain costs and the higher operational expenses associated with e-commerce.
The Christmas trading period, which Woolworths identifies as critical, will test its ability to balance cost management with delivering value to customers.
To encourage shareholders to remain focussed on the longer term, Woolworths is pursuing several initiatives such as expanding its e-commerce operations, diversification – the W Living segment is poised for growth in high-demand categories such as pet care and digital marketplaces – and upgrading the supply chain to enhance efficiency and support profitability.
But whether these laudable developments will ensure shareholder loyalty remains to be seen. Its start to 2024-25 highlights both resilience and vulnerability, delivering top-line growth but revealing pressure on margins in the shadow of legal and regulatory challenges. It could still turn sour for the country’s biggest supermarket chain in 2025.
