Woolworths Group Limited (WOW) Earnings Call Transcript

Thank you for standing by, and welcome to the Woolworths Group F '24 Q1 Sales Announcement. [Operator Instructions] I would now like to hand the conference over to Mr. Brad Banducci, Managing Director and CEO of Woolworths Group. Please go ahead.

Good morning, everyone. Before we start the call today, I would like to acknowledge the traditional custodians on the land on which we meet today, the Gadigal people of the Eora Nation, and I'd like to pay my respects to elders past and present. We recognize their strength and enduring connection to lands, waters and skies as the custodians of the oldest continuing cultures on the planet. Thank you for joining us today for Woolworths Group's first quarter sales results for the 2024 financial year. Joining me this morning are Stephen Harrison, our CFO; Amanda Bardwell, Managing Director of WooliesX; Natalie Davis, Managing Director of Woolworths Supermarkets; Guy Brent, Management Director of The Woolworths Food Company; Spencer Sonn, Managing Director of Woolworths, New Zealand; Dan Hake, Managing Director of BIG W; Von Ingram, Management Director of W Living. Turning to Q1. If there was a theme during the quarter, it was a moderation inflation in our food businesses, which is critical for our customers. In Australia, the moderation inflation has been offset for higher item growth, whereas in New Zealand item growth has been more challenging. Secondly, we've seen a broad -- we have broadly seen a continuation of customer trends from Q4 into Q1 and the start of Q2. At an overall level, customer spend remains resilient, but we have seen a slow demand in more discretionary areas and are trading into our RED program and own brands from customer segments more exposed to cost of living pressures. Group sales increased by 5.3% to $17.2 billion for the quarter, predominantly driven by Australian Food. Customer scores across the group were broadly stable compared to Q4, but down on the prior year. While we had notable improvements in our availability scores in food and order completeness in our online businesses, this was offset by declines in value-for-money perception. Providing our customers with value remains our key focus. And we activated a number of new value mechanics for our customers during the quarter. This included our We can Help You Spend Less campaign with Prices Dropped for Spring, the launch of new pricing and our brand value Own Brands at low prices even lower. Particular highlight in the quarter was the continued strength in e-commerce with group e-commerce sales up 16% to $2 billion in Q1, driven by WooliesX e-commerce sales as the demand for convenience continues unabated. Weekly average traffic to group digital platforms also continued to grow strongly, up 4.4% compared to Q4 and 22.8% in the prior period, to reach 24.8 million customers per week during the quarter. Excuse me. I have a little bit of a tickle in my throat problem, sorry. In Australian Food total sales for the quarter increased 6.4% in Q1 to $13.1 billion for the solid growth across Woolworths Food Retail, WooliesX and our accelerators. Woolworths Food Retail grew by 6.1% despite the moderation in inflation, supported by strong item growth. Item growth of 2.2% was mainly driven by increased demand for fruit and vegetables and meat supported by improved availability and lower prices as well as by strong e-comm item growth. Woolworths Food Company's own and exclusive brand sales grew 7.8% with an increase in penetration during the quarter. Long Life sales increased by 14.4% with item growth of 4.6%, driven by a particularly strong growth in pantry and household care, which prices increased 2% in Q1 with a significant moderation compared to the prior quarter, largely driven by double-digit deflation in fruits and vegetable, with material reductions in berries as well as vegetables such as lettuce, cucumbers, capsicum and tomatoes, the 4 from better growing conditions. Long Life food prices have started to flow through to retail prices in red meat. Excluding tobacco and fruit and vegetables, average prices increased by 4%, but we are foreseeing some moderation in most Long Life categories. WooliesX eCommerce sales increased by 18.4% to $1.559 million, with penetration reaching 12%, an increase of 125 basis points on the prior year. eCom sales growth continues to be driven by a growing demand for convenience, with pickup contributing 57% of sales growth for the quarter, benefiting from our investments in direct [ distribution ]. We also saw double-digit growth in delivery sales, driven by increased demand for same-day orders, now 38% of total delivery orders. Delivery Now also continued to grow strongly. Cartology media sales increased by 28% in the quarter, reported by the Shopper Media acquisition, growth in BIG W and benefits from the Disney collectibles program running Woolworths Food Retail during the quarter. Australian B2B sales increased by 1.5% compared to the prior year with growth rates impacted by our -- exit from our international business in H2 last year. Excluding the exited businesses, sales increased by 6.2% with PFD growing by 9.3%. New Zealand food sales increased by 2.8% to just over NZD 2 billion. Lower inflation and item declines resulted in a slow growing -- slowing sales trend during the quarter. As we foreshadowed in August, a challenging economic outlook and the competitive landscape means the short-term outlook for the business remains uncertain. At this stage, New Zealand Foods' H1 EBIT is expected to be below H2 F '23 and the prior year. Now one of the early days, the transformation of the business announced in July is progressing well with our new pricing mechanics launched late in the quarter showing positive early traction. BIG W sales declined by 5.5% on the prior year with a modest improvement in trend in the latter part of the quarter. While customers continue to be cautious and are trending down within categories, we've seen solid growth in summer apparel and in opening price point products that offer real value. We're also seeing customers and sales growth in the more affluent customer segments increasing as they're trading to BIG W. While profit in the half to date has been impacted by the decline in sales and higher wage costs, the Christmas trading period will determine the success of the half. Turning to current trading. Sales trends in October to date have remained broadly in line with the trend line seen in Q1. We know that value for money remains front of mind for our customers in the lead up to Christmas, and we are confident in our plans to deliver great value over the holiday period. Keeping our team safe and helping all of our customers have an inspirational and affordable festive season is our key focus in the period ahead. Finally, in anticipation of the question, I want to provide an update on our voting intentions for Endeavour Group at the upcoming AGM. We proposed to vote in accordance with the [ EDB ] Board's recommendations, supporting the management team of Endeavour Group and their plans to deliver long-term shareholder value. We are not going to make any further comments on this issue in this call. I will now turn the call over to the operator for questions. To give everyone a chance, can I please ask that you limit it to one question per person and then rejoin the queue with any follow-up questions.

[Operator Instructions] Your first question comes from Shaun Cousins with UBS.

Brad and team, just a question on Australian Food. Real like-for-like sales growth improved to 3.5% in the quarter given that quite dramatic decline in inflation. I'm just curious what's driving that volume growth. Is it population? Is it trading from out of home? And how do you square that improved real like-for-like with PFD growing at 9.3%? I guess, we're conscious that the consumer is quite varied, but trying to square some channel shift to grocery and I guess how resilient that is with what still seems quite buoyant growth you're enjoying out of PFD, please.

Sure. Thank you for managing to triage 2 questions into 1. Let's see how I go. Good to hear from you. Look, it was pleasing to actually see item growth, a [ bull ] back into our Woolworths retail food business. In terms of where it came from, there are a couple of areas. Firstly, we do have volume elasticity related to prices in fruits and veg and meat. As we move prices down, you have seen volumes grow, which is terrific and something we aspire to do and building more affordable to health in Australia is something that's right on message for us, so there was some volume elasticity with price declines in fruits and veg and meat. We also saw some trading in 2 Woolworths Supermarkets in categories like health and [ well-being ], where we saw customers actually start trading in to us given we are actually a value player relative to specialty in segments like that, so that was another good source of volume growth. The third source of volume growth was increasing great value delivered through our own brands. And just very dramatic for us in the long life categories, in particular, things like pantry or in household care, but just really basic value categories with a price deferential between our own brand and the brand the alternative grew, and we saw customers trading into them, so really strong growth there. I should add, for completeness, that we did lose some items in the basket, and that's something we need to work hard on in general, in the nonfood ambient categories in our stores, so what we call everyday needs. And so that's become a very competitive part of our business given the number of competitors who's trying to enter that segment to provide some essential and traffic drivers into the owned business, including our BIG W business, and Everyday Needs was growth there, with a number of competitors. So that's what happened broadly in the store. And Shaun, on top of that, eCommerce and the growth in eCommerce really did accelerate that, but it was great to have growth at an item level in-store and then eCommerce coming over the top and really accelerating the overall growth. And with an eCommerce basket running 40 to 42 items and you get that nice growth, it's not hard to see how that'll flow through to overall item growth. I should also add, finally, on this issue, focusing on items, and we've talked about this a lot on the 18 -- last 8 months, but item-based productivity is something that we're very, very focused on, because we think it gives you a much clearer view where we sit in the competitive context of the markets we operate in. Now reconciling the PFD numbers back to the retail numbers, we are lucky as we are in retail and we cover all the segments of retail for food. We also do the same with PFD on foodservice. And so people are trading through the different channels. But given we're bigger across those channels, we get to net benefit. So obviously, airline catering and cruise ships are segments that were very low previously, and they're coming back into growth, but we're also seeing strong growth into QSR as people trade out of white table cloth into the more value segments in particular, our young, singles and couples. So that's why you can see both of these reconcile itself. Hope that's helpful.

Next question comes from Michael Simotas with Jefferies.

My question's on volumes as well. And just a little bit surprising to see how strong your Long Life item growth is compared to the fresh category. So Long Life volume's up 4.6%, total volume's up 2.2%, notwithstanding the deflation in the Fresh category and better availability. Can you give us a little bit more color on sort of what you think is happening there and why Long Life volumes are so much stronger than Fresh?

Yes. Thanks, Michael. That's Own Brand, and so I'm sorry. Apologies if that wasn't clear in the document. And that's to do with the great value that we're delivering in our Own Brands in Long Life. In particular, those we either have on our RED program, prices dropped; but even more importantly, low price. Actually, what we're seeing very interesting at the moment, customers are obviously responding more disproportionately to Yello promotion. But price certainty is the other thing that customers are looking for. And low prices coming into its own in many way and giving great price certainty, and that's way over indexed our Own Brand. So that's the Own Brand growth, and it's been very pleasing in Long Life. It's a bit hard to be definitive on it, by the way, in Fresh, just given how you counted in Fresh virtually every product in a way is Own Brand, where you get your fruit and veg, so how you count it. But that's Long -- Own Brands and the strength we -- and the value we're delivering through Own Brands and Long Life to our customers.

Okay. So just to be clear, that 4.6% item growth is Long Life, Own Brands items, not…

Yes. Yes. Apologies for that. I was looking at…

Okay. So is it. No, no, that's okay. Yes. No, no, that makes more sense. So I guess the implication of that is that the fresh categories item growth is actually ahead of Long Life item growth if you include brand...

Yes. Yes. Yes. And it makes sense, right? I mean it is -- you do get some of the elasticity act, in particular, on fruit. But actually, we found it more vegetables than I think we expected, which was very pleasing. And as we started to adjust our meat pricing, we've seen the same happen in particular months actually. And then as we talked about it in the media call, but in our lamb leg and great pricing there, probably seen a bit more elasticity on volume than we had expected, which is great.

Our next question comes from Tom Kierath with Barrenjoey.

Just a question on the fruit and vegetable deflation at negative 12%. If I compare that to the ABS that for July and August, I think it was negative 5% and negative 8%. So it looks like your prices are down a bit more than the industry. Just wondering if there's a bit of investment happening there. And I guess, like, parlaying that in with the price perception, just going backwards a bit, I would have thought, if you're investing a bit more, that you might have improved on that metric.

Thanks, Tom, and I hope the Kierath household is robust and continuing to use our eCommerce services. Specifically, I'd actually need to dig into the mix. We're a slightly bigger vegetable business than we are a fruit business. We've seen more deflation in vegetables and more volume elasticity than we expected, so I need to go back and reconcile the 2 categories. We tend to bundle them together I find them very different in all characteristics in terms of how they behave and where the inflation has been. But deflation has been mainly in vegetables for us. We've been very averse with cost. It's true that it's so important to save for families. It's critical for their meal preparation and they disproportionately index to them, so I think it'll be something more in the mix than anything else. We want to be competitive across the entire shop. As you well know, we're obsessional on our index, and our index is in a good place across the entire shop. And that -- in particular, in vegetables is one we've pulled out a bit more now. So maybe a little bit of an increased focus on it, I would say, but no obvert desire to overinvest anything like that through inflation flowing through.

Your next question comes from David Errington with Bank of America.

Brad, can I ask a question on New Zealand? Your comments there don't, I have to be honest, fill me with a lot of inspiration. It looked like -- I know we talked about it. I know this is a sales call. It's not an earnings call. We talked about it the full year where the earnings do seem to step change down. I was hopeful of gaining a little bit of positiveness here, but there doesn't seem to be there. It seems to be a market that's continuing to decline. Can you give us a bit of an update? What's going on? And you say that the 15 stores that are rebranded, the reaction's been positive. Can you go into a bit what it is that makes it positive? Because overall, when you say that your first half EBIT's going to be below your half EBIT last year, it doesn't get the year off to a great start, Brad. So if you can give us a bit of an update as much as you can, given it's a sales call, that'd be really appreciated.

Thanks, David. And obviously, the nice thing about having a group is that you get overs and unders, and the group, as a whole, I think, has got a quite pleasing momentum. Specifically on New Zealand, what is very clear is it is a comprehensive market and more so than even Australia. And actually, most of the volume challenges in the first quarter where the rest of the market -- it wasn't even, I can say, which is a very formidable value large box player. It's the warehouse looking for growth and indexing into these everyday food needs and nonfood needs as well as the Costco launched, best we can tell, in Auckland, has gotten disproportionately well and would have to be one of the best performing Costcos in terms of the numbers as we try to solve them from the back of the envelope. So the rest of the market, there's a lot of competitive fruit and veg marketplaces as well in New Zealand, you would be aware of, has been very competitive. And then we've, of course, got Pak'n Save. So it's been a challenging market within, as we lap a collectible program we had the previous year, while we hold collectible program. And we were still finding that the benefits we got during COVID of the eCommerce growth, that eCommerce was negative growth unlike Australia, so not a lot going for us positively in the quarter. Now the things that make me excited about the business, positive about the business, out eCommerce is slightly going back into growth. We flushed out where we were, and we are a market leader, and we're growing share there. So it's nice to see how it goes back into growth, and that really helps our business, given most of their product is in-stores. Secondly, we've held customer traffic. In fact, it's up. It's been a market that's done. But as we relaunched our Yello program, which we did during the quarter, and then our Low Price program, we replicated what we did in Australia, we've seen a disproportionate balance in the items back into the basket from those programs and a material change in our customer value measures. So we'll see how that goes, but it's starting to see us build the basket back. And specifically to the rebranding, there were many risks associated with the rebrand, as you'd appreciate, David. That has gone as well as can be expected. And the reason it's gone better than we expected in the short term, anyway, we had 19 stores rebranded out, and we saw dual branding on the website. It's that -- that's not a rebranding. It is just -- it is a rebranding with price investment with better value delivered through the business. And so customers, if you're going to do something, they expect to get something back for themselves, and they're starting to see that, and they started to feel very good about that. So it started to get this positive roll going through the business. So do we feel positive about the business? Yes, David. Do we feel positive about earnings in the first half? We're justifiably nervous given the trend lines and everything that we need to turn around in the business in the first half. And what we do know as a group is if we just focus obsessionally when the customer getting the price and value metrics right, good things happen, and we'll do that, so it's important to coming back, and hopefully seeing all of those factors start going through. A number of other things in the quarter that it's worth pointing out. We actually launched [ movement ] to a really good start in New Zealand in their desire for convenience is no different than it is to Australia. We also did a soft launch of Everyday Rewards, which is we do the more formal launch in February, which has had great resonance with our customers as well. So just a lot of great cross tranche -- there has been collaboration, which is another real positive for us.

Your next question comes from Bryan Raymond with JPMorgan.

Just want to follow up actually on New Zealand as well. Just trying to understand the components of this moderation in profitability. So for the stores getting converted to Woolworths from Countdown, what sort of return on capital or EBIT uplift are you seeing on those stores, given obviously that's going to be a program which continues over the next 12, 18, 24 months? Are you seeing the returns match your expectations there? And just -- really just keen on understand that price investment comment a little bit further within that, given you said you're cutting prices as you do it.

Look, where the profit pressure comes from is the -- it's actually the wage cost increases, 7% on the 12% we had the previous year. So we're doing a compound 19% wage increase in New Zealand, which is, I think we can all agree, incredibly material in a market that's under huge pressure on the top line, so that's the #1 issue. The second issue for us has been, as we launched, relaunched our Yello program and our RED program, they've got huge resonance with our customers and we just need to make sure that we can balance out the GP margin impact of doing that, so just a lot of work to do. We wanted to get the program out there, and it's actually worked better than expectations to be honest. So we've got a bit of pressure on the GP line as we balance that out, which we can over time. And then, of course, we've got this material, and not to be underestimated, our wage pressure inside the bottom line. The rebranding cost itself is really not a major driver of any of things, to be honest, Bryan, and it's still early days, 19 stores. And from what we can see, we're actually getting a bit of a sales uplift, but I don't want to call it because causation -- I just don't know if its correlation or causation. We'll report back at the end of the year, but that's not at all a driver in any of this, to be honest with you. The rebranding just gives us a nice opportunity to reframe the business and reframe what we're trying to deliver through, as I say, our new Yello program, our new RED program, a real focus on Own Brands and so on.

Your next question comes from Adrian Lemme with Citi.

Just wanted to pick up on the earlier comments about customer perception dropping on pricing. I don't want to cherry-pick, but I have noticed in the drinks category, there's about a 5% premium on the full price between yourselves and your nearest competitor on the sort of major -- the usual pack sizes, so I just wanted to know what's going on there, because I would have thought, these are key value items, sort of it's a big category for you guys. Yes. So I just wanted to know how that's sort of playing into the price perception stuff, please?

Okay. Adrian, if there's a 5% price gap, please let us know afterwards and it will be addressed by the end of the day because that's not our plan. That's not what I see in the index, but you might perceive something where you are, so we'd greatly appreciate it, afterwards, if you can send us the details. It's certainly not our plan at all. Now it would be fair to say, the drinks category is growing very strongly, actually. It's actually very quite strongly in Own Brands as people who have headed out of the sugar based into more water and sparkling water-based categories. And so we're actually seeing very strong growth in the category. And despite what I've said about -- even the sugar-based products, it is a category that is performing increasingly -- the promotions are becoming more and more successful. What we're seeing is not more promotions in our stores, but higher promotional uplift. So it is a category that's growing strongly, a lot of promotional uplift and a lot of move into more healthy water-based, carbonated water-based solutions. But we should see something different other than -- we…

I'm not sure that's right, so it'd be good to save the details there, but we're growing very strongly in drinks in particular as we've had that warmer weather from September. We've really been focused on availability of soft drinks and water, and we've had some record sales weeks. We've actually got some quite strong unit growth coming through in drinks as well. So we're certainly feeling positive, I think, around the lead into Christmas there.

Your next question comes from Lisa Deng with Goldman Sachs.

Brad and team, I just wanted to understand, ahead of the important Christmas trading period, some of the nuances that we should be considering. So I think -- can you please update us from where the supply chain issues were around Christmas last year or even absenteeism and where we're looking to be this year? And then again, it's weather, we talked just about beverages now, but, like, if there's anything that we should consider in warmer weather and also a 53rd week trading, if -- can you please confirm that, that is the case as well?

Thanks, Lisa, and 63 days to Christmas, conceptually, availability is a tailwind for us. And we see, as Natalie just talked to, when we get availability right and getting sales capacity right and beverages has been a real tough channel. It's been on mind, the supply chain disruption there. When we get availability right, we are seeing nice sales growth. We can't quantify the number because a lot of our availability issues in the last few years were implicated in our competitors, so it's kind of hard to be definitive. But conceptually, we do see improved availability as a tailwind. And our availability levels, in general, are where they were pre-COVID. So we're sort of sitting back in the high 90s in store service levels mid-low 90s or 90 in outbound service, and that's true across all of our supply chains. Now invariably, as you would read in the paper and you would well know, there are full challenges we have on a day-to-day basis, in particular, in Victoria -- all for our Victorian team. We've had a lot of the -- we've had some more disruption. Actually, we've been quite lucky on the milk disruption with some of the strikes we've seen there, had some challenges, as you'd be aware, in poultry. We've had some challenges of our own just in term of our DCs. But in general, we're in a very good place, and there's a tailwind. Secondly then, generally good weather. It's good for families entertaining collectively at home and you do get some sales uplift. We're very worried about the downside impact of this good weather, which could be a big fire season. And so resilience planning is in our top 3 right priorities now. We did a lot of long-term weather forecasting. We're building inventory in Far North Queensland and so on, because we're worried about the downside impact of this weather in terms of how it might challenge our infrastructure. But conceptually, the weather looks good. And conceptually, the run into Christmas and the days running to Christmas are also actually a pretty ideal series of sequences of days, so we're cautiously optimistic, as always, on this. We just need to keep focused. We feel we've got a great value plan going into Christmas. We feel we are where we need to, and we just need to continue to obsessionally address the value for money issue our customers have. 53rd week.

Yes, the 53rd week, Lisa, is second half in terms of the reporting, so it won't impact us this first half of earnings.

Next question comes from Craig Woolford with MST Marquee.