Why is the Woolworths (WOW) share price on a rebound?

Posted: 23 February 2022 12:51 pm
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Ahead of today's results, the retailer's shares had dropped 14% over the last 6 months.

Shares in supermarket giant Woolworths (ASX: WOW) are again among the most traded stocks on the ASX. Despite weakness in the overall market and a poor record over the last few months, the WOW stock is up nearly 2% to $35.85 at the time of writing.

Shares in rival Coles (ASX: COL) were also up 2% today.

What is lifting sentiment in the Woolworths (WOW) stock price

Woolworths reported its first-half results on Wednesday, ​​posting a net profit of $7.06 billion. But the major gains came with its demerger of the Endeavour Group pubs and drinks business.

Earnings before interest and tax on continuing operations fell 11% to $1.38 billion, prompting the company to slash its interim dividend by a quarter to 39 cents a share.

However, investors are focusing on the retailer managing to lift revenue for the 27 weeks to 2 January by 8% to $31.89 billion. That came thanks to a solid performance at its flagship supermarket business, with Australian food sales up 3.4% for the half. Overall, Woolworths retail sales lifted by 3.2%.

"While the far-reaching impacts of COVID resulted in one of the most challenging halves we have experienced, we ended H1 strongly with positive trading momentum and helped our customers enjoy a much-needed Christmas celebration and festive holiday season," CEO Brad Banducci said.

That positive momentum has partially extended into the second half, with Mr Banducci saying the spread of the Omicron variant resulted in strong supermarket sales for the first 7 weeks of 2022, although it also dented sales for its Big W general merchandise chain.

Costs weigh

Investors had expected a dip in earnings after Woolworths outlined a hit to margins in December, due to a combination of rising costs from repeated lockdowns and a shift to normal patterns of trading – although earnings fell lower than expected. Rival Coles also reported a 2.0% drop in first half profit on Tuesday largely due to COVID-related costs.

Woolworths also emphasised the continuing cost pressures. It said the costs of keeping its stores and distribution centres COVID-safe, including incentives and discounts to staff, surged to $239 million in the first half, compared to just $55 million a year ago. It has already booked similar costs of $34 million in the first 7 weeks of 2022, although these are expected to moderate.

Mr Banducci said shelf prices had already increased by 2% to 3% due to cost pressures and amid supply chain disruptions, warning it was "inevitable that some prices will increase".

Meanwhile, performance at its Big W chain was badly hit by trading restrictions with earnings sliding 81.2% to $25 million. The retailer expects a challenging period for the business, but still expects it to report a profit in the second half of the financial year and return to solid growth over the longer-term.

The New Zealand supermarkets business was the star performer, with sales growth due to extended lockdowns and earnings up 5.8%. Online sales also continued to grow strongly, increasing nearly 50% in the 6-month period.

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