COVID-19 has ‘material impact’ on Woolworths’ financial performance

28 August, 2020 by Andy Young

As reporting season continues we increasingly see the financial impact of the COVID-19 pandemic, this time with Woolworths reporting a year of two halves: the first half saw strong EBIT growth, but that growth was distorted in the second half of the year by COVID.

The Group’s net profit from continuing operations fell 21.8 per cent to $1.16bn for the year, largely driven by significant one-off costs of $500m relating to staff payment shortfalls and $275m for COVID-related costs including additional in-store cleaning and security.

Advertisement

Woolworths CEO Brad Banducci said: “COVID-19 had a material impact on the Group’s financial performance for the year. After strong first half Group EBIT growth of 11.4%, EBIT growth in H2 was distorted by COVID. The closure of Hotels for much of the last four months of the financial year led to a material decline in its H2 EBIT compared to the prior year. However, the impact of the closures was partially offset by strong sales-driven EBIT growth across our retail businesses, despite materially higher customer and team safety costs.

For Endeavour Drinks total sales increased by 9.9 per cent (normalised) to $9.3bn for the year, with comparable sales increasing 7.9 per cent. The group highlighted the challenges of 2020 as total sales in the fourth quarter grew by 23.2 per cent, but said this was in contrast to “a subdued trading environment in the second and third quarters”.

For the hotels business sales declined by 19.5 per cent compared to the previous year to $1.3bn. In the first half hotel sales increased by 6.2 per cent, but the government closure of venues from 23 March “materially impacted” sales.

Sales in quarter three, where venues were closed for two weeks in the quarter, declined 12.9 per cent, however in the fourth quarter, venues were closed for most of the quarter, with sales declining by 86.3 per cent on a normalised basis.

Banducci added: “Endeavour Group was created in February following an internal restructure and merger of the Group’s retail drinks and hotels businesses.

“Despite a slower initial sales uplift than food, Endeavour retail sales increased dramatically from late March and continued throughout Q4. Dan Murphy’s was particularly strong as its range and value resonated with customers. F20 EBIT increased by 5.7 per cent but H2 EBIT growth was lower than H1 due to higher operating costs and some negative mix impacts.

“Following a Government directive, all of Hotels’ venues were shut on 23 March. Venues began to reopen from June but continue to operate under various levels of restrictions depending on the state, with all Victorian venues again closed from 5 August.

“The closures had a material impact on sales and EBIT with a loss before interest and tax of $52m in H2 compared to EBIT of $144m in the prior year. For F20, Hotels EBIT declined by 51 per cent.

“The Group continues to pursue a separation of Endeavour Group and this is expected to take place in calendar 2021.”

Looking at the performance in FY2021 and the rest of the year, Banducci said: “While we have got off to a strong start to F21, the outlook for the remainder of the year is very difficult to predict as evidenced by recent events in Victoria and New Zealand.

“Unfortunately, we expect to be living and working with COVID for the foreseeable future. We support government measures to contain the virus and support the economy but expect conditions to remain volatile and challenging. As a result, our focus on value, range and convenience will continue and we will not compromise on creating a COVIDSafe environment for all our customers and team.

“Sales growth in the first eight weeks of F21 has been strong across all of our businesses except for Hotels. However, the resurgence in COVID cases and increased restrictions, particularly in Victoria, has also led to higher costs to operate in a COVIDSafe way.

“For the first eight weeks, incremental COVID-related costs have been approximately $107m (excluding typically higher team and Supply Chain costs due to higher sales volumes). Currently, we are assuming that some level of elevated sales and costs will continue for the remainder of H1 F21.

He added: “In Endeavour Drinks, sales growth has also remained strong at 23.7 per cent as the business continues to benefit from greater in-home consumption. Priorities include innovating the customer and team experience; differentiating the core customer offer through range, value and service; and redesigning the businesses end-to-end operating model.

“In Hotels, our focus is to continue to adapt to the uncertain operating environment to provide the best experience for our customers and provide certainty for our teams.

Currently 80 hotels and five managed clubs remain closed in Victoria while other venues continue to operate under the applicable state conditions. Despite a continued material impact on sales in F21 to date, Hotels was profitable in July but below last year. Profit for the year is highly dependent on the level of restrictions in place and the ability to operate by state.

“In summary, while there are many uncertainties in the year ahead, we will continue to be guided by our Purpose, Agile Ways-of-Working and Core Values and are committed to making COVIDSafe and COVIDCare part of everything we do. We have an experienced and resilient team, our business in a strong financial position, and we are focused on continuing to create better experiences for our customers, team and shareholders in F21.”