The battle within the Australian supermarket industry continues to go the way of retail conglomerate Woolworths Group Ltd (ASX:WOW), which has again managed to outperform the Wesfarmers Ltd (ASX:WES) owned Coles during the latest reporting season. The most recent result is the 5th straight quarter that Woolworths has outperformed Coles and signifies the effectiveness of its turnaround strategy.
Sales and margin growth
Sales for the December 2017 half year period in Woolworths' Australian Food division rose by 4.9% to $19.34 billion with Earnings Before Interest and Tax (EBIT) to sales margins rising by 26 basis points to 4.7%. This led to a very impressive 11.1% increase in divisional EBIT to $901 million, which represents 63% of the group's total earnings from continuing operations. Whilst problems continue to persist with department store chain Big W, the pleasing results from the Food division were the major catalyst in group earnings from continuing operations rising 9.9% to $1.43 billion.
Woolworths remains the largest player in the supermarket industry and is using its scale to heavily invest in lower prices and boost transaction volumes. Despite the large investments made in cutting prices, margins have not been compromised because a faster turnover of inventory has resulted in reduced stock loss. Woolworths has also significantly invested in store refurbishments and data mining to deliver customer benefits faster and improve the overall customer experience. The growth across the company's key customer satisfaction metrics has demonstrated the effectiveness of this strategy.
Falling sales and margin compression
In contrast to Woolworths, the Wesfarmers owned Coles delivered a disappointing result for the December 2017 half year. Revenues declined by 0.4% to $19.98 billion with EBIT also falling by 14.1% to $790 million. Food and Liqour managed to grow marginally at 1.1%, whilst the Convenience segment saw revenues decrease by 8.1%. The drop in divisional profitability was attributed to a relatively high level of price deflation, driven by lower fresh produce prices that saw Coles' EBIT margin fall from 4.6% to 4.0%.
Foolish takeaway
Woolworths appears to be returning to its core strength in food and drink following its misguided entrance into the hardware sector with Masters. After the dividend cuts during the 2017 financial year, the company is once again raising its dividend payout to shareholders. However, its dividends still remain below the level of several years ago. At current prices, the stock trades around for around 21 times forward earnings, which in my view is slightly on the high side for the growth prospects of a defensive business.
