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Woolworths Group Ltd (ASX:WOW) shares sink lower on results release

The Woolworths Group Ltd (ASX: WOW) share price has started the week in the red following the release of its results for the 12 months ended June 30.

In morning trade the retail conglomerate’s shares are down 2% to $29.08.

Here is a summary of how it performed in FY 2018 compared to a year earlier:

  • Sales from continuing operations rose 3.4% to $56.7 billion.
  • Earnings before interest and tax increased 9.5% to $2,548 million.
  • Net profit after tax of $1,676 million, up 13.1%.
  • Net profit after tax from continuing ops climbed 12.9% to $1,605 million.
  • Earnings per share of 123.4 cents.
  • Final dividend of 50 cents per share and a special 10 cents per share dividend.
  • Outlook: Soft start to FY 2019.

A key driver of profit growth in FY 2018 was the company’s key Australian Food business. Sales grew 4.3% on the prior corresponding period to $37,379 million and earnings before interest and tax (EBIT) rose 9.6% to $1,757 million. Profits grew quicker than sales due to a 63-basis point rise in the segment’s gross margin to 29.1%.

The segment achieved strong comparable sales growth of 4.3% for the full-year but this moderated as the year went on. Fourth-quarter comparable sales growth slowed to 3.1% and has softened further in FY 2019. So far in FY 2019 comparable sales are up just 1.3% in the Australian Food segment.

The company’s Endeavour Drinks segment, which includes the Dan Murphy’s and BWS businesses, had a solid but unspectacular year. It achieved sales of $8,271 million and EBIT of $516 million. This was an increase of 4.5% and 2.8%, respectively. Although the segment saw a small improvement in its gross margin, its operating costs rose at a quicker pace.

The ALH Hotels segment delivered a strong result. Sales grew 3.7% to $1,612 million and EBIT rose 11.1% to $259 million.

Things weren’t quite as positive for its New Zealand supermarkets. The company’s New Zealand Food segment delivered a 3.4% increase in sales to $6,396 million, but saw EBIT decline 8.2% to $284 million. Slight weakness in its gross margin and a jump in operating costs weighed on its performance.

But that performance looks good in comparison to the company’s struggling Big W brand. Big W sales rose 0.7% $3,566 million but the brand posted a loss before interest and tax of $110 million.

Outlook.

Management expects continued progress from the BIG W brand with a further reduction in losses in FY 2019. But its financial performance will be driven by the key Christmas trading period.

As mentioned above, the Australian Food business has started the year slowly with comparable sales growth slowing to just 1.3%. Management has blamed the phasing-out of single-use plastic bags, competitive pressures, and food deflation for the weakness. It does, however, expects sales momentum to improve over the course of the first half.

Should you invest?

I didn’t see enough in this result to make me want to pick up shares today, especially as they are currently trading at over 23x earnings.

In light of this, I would suggest investors hold out for a better entry point. The same applies to the shares of rival Wesfarmers Ltd (ASX: WES) which I don’t feel offer a compelling risk/reward right now.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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