Woolworths Profit Climbs 19% on Reduced Supermarket Costs

Woolworths Ltd., Australia’s largest retailer, said first-half earnings rose 19 percent as cheaper imports and cost-cutting helped wring more profit from sales that increased only 3.2 percent. The shares hit a record.

Net income rose to A$1.16 billion ($1.19 billion) in the six months ended December from A$967 million a year earlier, Sydney-based Woolworths said in a statement today. The result compares with the A$1.17 billion median estimate of seven analysts surveyed by Bloomberg News.

Woolworths sold its Dick Smith electronics chain and spun off shopping malls to investors as Chief Executive Officer Grant O’Brien invests in the company’s biggest business of supermarkets. Second-ranked Coles, owned by Wesfarmers Ltd., has revamped stores and cut the price of everyday staples such as milk and bread to win customers.

“It’s a well-managed franchise, food inflation’s coming back, and there’s operating leverage in the business,” Rhett Kessler, a fund manager at Pengana Capital Ltd., said by phone from Sydney before today’s announcement.

Woolworths rose 2.7 percent to close at A$34.93, the highest level since a 1993 stock market listing. The stock has gained 19 percent this year, outstripping the 9.8 percent advance for the S&P/ASX 200 index.

Investigating Claims

Earnings before interest and tax from Australian supermarkets, which accounted for about 85 percent of first-half sales, rose 6 percent to A$1.65 billion. Those at the second-ranking Coles supermarket jumped 15 percent to A$755 million over the equivalent period, owner Wesfarmers Ltd. reported Feb. 14.

Australia’s antitrust regulator is investigating claims that major supermarkets are abusing their position, the agency said Feb. 14. Woolworths was co-operating with the regulator and had to strike a balance between suppliers and shoppers, O’Brien told a media call today.

“Competition is alive and well in this country and that’s borne out by the deflation” in grocery prices, he said. “The customer is why the business exists and that’s who we favor in those negotiations.”

The retailer has increased store space by about 2.4 percent in the past six months to expand its retail network which serves 20.2 million customers per week, equivalent to about 88 percent of Australia’s population.

Hotels Unit

The improvement in earnings was supported by a A$231 million writedown of the Dick Smith electronics chain in the previous year. Woolworths sold the business in September to buyout group Anchorage Capital Partners for A$20 million, or about five days worth of revenue for the business.

Woolworths also spun off its malls into Shopping Centres Australasia Property Group last year to boost shareholder returns, and took a A$94 million charge in the most recent period due to costs from that and the Dick Smith deal.

The Big W discount chain had an 8.3 percent increase in earnings to A$130 million as it sourced more of its clothing directly from Asia, raising profit margins, Julie Coates, director of the chain, said in the media call.

Direct sourcing from Asia had also helped as the supermarket division introduced own-brand Chevron batteries, Tjeerd Jegen, director of the unit, said on the call.

The hotels unit, Australia’s biggest operator of pubs, had a 21 percent rise in profit.