The Woolworths Group Ltd (ASX: WOW) share price is one to watch as the company released a FY22 first half update.
COVID hurting profitability
Woolworths explained to investors that COVID is impacting its stock flow and ‘operating rhythm’. It said that it had put the health, safety and wellbeing of customers and team first.
Year on year, its supermarket sales are up on a one-year basis (up 3%) and strong on a two-year basis, though the growth is slowed as lockdowns ended in the second quarter of FY22 (up 2% so far). Management is pleased with that revenue growth.
The company is pleased with its stock levels and trading momentum is positive going into Christmas.
E-commerce sales have continued to grow strongly – increasing 50% in the half. Online sales made up 11% of the total Woolworths sales and profitability of e-commerce improves (though is lower margin).
Approximately $40 million has been invested on building its e-commerce capabilities, leveraging advanced analytics and growing digital demand generation, such as its subscription model for delivery.
COVID costs
The pandemic environment is hurting expected first half year earnings. There is both direct COVID-related costs and indirect impacts caused by the disruption, particularly with its supply chain and the inefficiencies it’s causing in the stores, distribution centres and transportation.
Woolworths has also decided to thank its staff by making a $35 million to $40 million bonus payment to staff for their significant efforts during this time.
For the first half, direct COVID costs are expected to be approximately $150 million (0.6% of sales). The indirect disruption to stores and distribution centre disruption has seen elevated operating costs of approximately $60 million to $70 million. Supply chain costs were also impacted by higher volumes, fuel price increases and the impact of balancing supply across distribution centres.
EBIT expectations
Australian Food EBIT (EBIT explained) is expected to come between $1.19 billion and $1.22 billion for the first half of FY22, That would be a reduction of 8% to 9.3% from the first half of FY21.
Other businesses
The re-opening of Big W stores has helped sales. Second quarter sales were only down 3.3%. However, the closures have significantly impacted Big W’s profit EBIT for the FY22 first half. The Big W EBIT is expected to be between $20 million to $30 million, down from $133 million.
New Zealand supermarket sales growth has been strong, benefiting from extended lockdowns and higher inflation in the country.
Summary thoughts on Woolworths and the share price
It seems that Woolworths has experienced the best of the boom in supermarket demand. Achieving sales growth in this environment is quite impressive, but the drop in profitability is more significant in my opinion.
Woolworths is a pretty good, defensive business. But I wouldn’t want to add it to my portfolio at this stage. Perhaps if the Woolworths share price falls a bit it may be more interesting.
For me, there are other ASX dividend shares that may be better options for longer-term growth.