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Wesfarmers still eating Woolies’ lunch

Woolworths Limited (ASX: WOW) has today reported a full year net profit of $1.8 billion, down 14.5% over the previous year, after writing down the value of its Dick Smith operations by $420m. Underlying earnings rose by 3.6% to $2.2 billion compared to the previous year, reflecting slowing sales growth and significant food price deflation. It is the first fall in full year net profit since 1999.

Revenues rose 4.4% to $55.5 billion, while average prices are down 4%, and the company reported that trading continues to be impacted by price deflation particularly in produce, seafood, bakery and deli. The company declared a fully franked final dividend of 67 cents, taking total dividends for the year to $1.26.

Comparable store sales in the company’s key food and liquor division rose 1.1%, compared to 3% in 2011. Competition with Coles – owned by Wesfarmers Limited (ASX: WES) and Metcash Limited’s (ASX: MTS) IGA stores continues to push prices down, and combined with weak consumer sentiment, its no wonder CEO, Grant O’Brien said that “these are the toughest retail conditions in recent times.

This is likely to put more pressure on suppliers such as Goodman Fielder Limited (ASX: GFF) and Coca-Cola Amatil Limited (ASX: CCL) to reduce their margins further.

The company has decided to writedown the value of its Dick Smith Electronics business by a further $120 million up in addition to the previously announced $300 million provision and virtually valuing the Dick Smith business at zero. It also appears increasingly unlikely that the company is going to be able to offload the business, unless it gives it away.

Despite the low headline growth, the company managed to increase its margins and claimed that it was increasing its market share, customer numbers and items sold. On average, Woolworths served 19.5 million customers per week.

The company’s Masters home improvement stores increased sales by 24.7% to $828 million, and with the further rollout from the existing 15 stores to a target of 150 stores, growth in sales should continue.

Woolworths has provided guidance for profit growth of between 3 – 6%, based on a normalised 52-week basis, as the 2013 financial year will be a 53-week year, which the extra week adding around 2% growth.

The Foolish bottom line

With tough conditions likely to continue in 2013, Woolworths is still running at a hundred miles an hour, which it needs to do just to achieve slow growth. Over the long-term, that should pay off when consumer confidence returns.

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Motley Fool writer/analyst Mike King owns shares in Woolworths. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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