Woolworths surges to 17mth high of $35/sh on earnings – just don’t ask about tobacco

Woolworths (ASX:WOW) has jumped +12% in afternoon trades per CBOE live data as investors shrugs off a significant item expense of $485M related to a Federal Court wage ruling, and instead eye Group NPAT (pre-significant items) up +16.4% vs pcp to $859M.

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After that wage payout, group NPAT was actually down nearly -50% vs pcp, but clearly investors are keen to wait around for that to fall off the books.

Critically, Woolworths will also pay a dividend of 45cps; up +15% vs pcp.

Australian food sales climbed +3.6% in the first half with Woolworths Food Retail sales, ex-tobacco, climbing +4.3%. Woolworths pointed to strong ecommerce activity in Q2 and Australian food EBIT for H1 jumped +9.9% as margins climbed 32bps.

Big W had a more profitable half according to the company with clothing and petware being key categories for that brand; while margins and sales increased, Woolworths noted that “customers continue to be value-focused,” continuing to go between stores to find the best deals.

In other words: a lot of Australians are feeling the crunch of the cost of living crisis and mortgageholders in particular are likely feeling the ongoing pain of higher interest rates – raised once again by the RBA earlier this year.

That’s likely similar to saying water is wet for anybody living in the real world and for some, Woolworths’ +16% jump in profits might be something not to celebrate. (Presumably, those who didn’t buy Woolworths shares years ago.)

But the Woolworths result shows an ongoing trend across a basket of reporting consumer stocks – the Australian consumer remains bargain-hunting, but on the whole, continues to fare more or less well. At least, that’s what company reports seem to indicate.

That said, WOW now has 800 products part of its ‘Lower Shelf Price’ program; presumably it’s copping less scrutiny here than Coles which is currently in the Federal Court – brought by ACCC – for being a little bit too poetic with the way it defined discounts.

The only real persistent sore spot for Woolworths remains tobacco sales which, if this finance journalist is to understand a paragraph on page 7 correctly, are helping to increase gross margins by 8bps, but if without tobacco, that margin growth actually went negative at -14bps.

Suggesting that if black market tobacco continues to divert customers from taxed OTC tobacco, Woolworths’ margin growth overall is perhaps skating on ice. Then again, bumper profits (ignoring the Federal Court wage issue.)

For those playing at home, the term “AI” only shows up twice in Woolworths’ half-year results announcement, largely referring to the eStore’s tendency to show customers recommended options, which I suppose is AI, if you squint.

WOW last traded at $35.02/sh.

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