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Woolworths share price on watch following FY 2020 profit decline

Woolworths share price
Source: Woolworths

The Woolworths Group Ltd (ASX: WOW) share price will be on watch on Thursday following the release of its eagerly anticipated full year results.

How did Woolworths perform in FY 2020?

For the 12 months ended 30 June 2020, Woolworths delivered an 8.1% increase in sales to $63,675 million. This was driven by strong sales growth across all businesses, excluding the Hotels business which was forced to close during the height of the pandemic.

A key driver of growth during the year was its online business. It generated online sales across its brands of $3,523 million in FY 2020, up 41.8% year on year. This means group online penetration is now 5.5%, up 131 basis points on the prior corresponding period. Customer visitation across its digital assets increased 63.8% during the year.

However, due to an increase in its cost of doing business, this strong sales growth didn’t flow through fully to the bottom line. Woolworths advised that its higher costs primarily reflect operating in a COVID-19 environment in the second half, higher team member payments under new enterprise agreements, and one-off items impacting central overheads a year earlier.

As a result, the company’s earnings before interest and tax (EBIT) from continuing operations before significant items decreased by 0.4% to $3,219 million on a normalised basis. Though, excluding the Hotels business, EBIT would have been up 5.8% year on year.

Finally, on the bottom line, normalised net profit after tax was down 1.2% year on year to $1,602 million excluding significant items. Including them, net profit after tax was $1,165 million.

A final fully franked dividend of 48 cents per share was declared, bringing its full year dividend to 94 cents per share. This is down from $1.02 per share in FY 2019.

Material COVID-19 impact.

Woolworths Group’s CEO, Brad Banducci, revealed that the pandemic had a material impact on the company’s performance.

He commented: “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.”

Outlook.

Woolworths has started the new financial year strongly, but notes that “the outlook for the remainder of the year is very difficult to predict as evidenced by recent events in Victoria and New Zealand.”

For the first 8 weeks of FY 2021, total sales are up 12.4% compared to the prior corresponding period.

Australian Food sales are up 11.9%, New Zealand Food sales are up 8.3%, BIG W sales have jumped 21.1%, and Endeavour Drinks sales are up 23.7%. This has offset a 31.3% sales decline from the Hotels business.

Also growing strongly are its online sales, which are up 84.6% during the first 8 weeks of the financial year.

Though, offsetting some of this sales growth is $107 million of COVID-19 costs during the period. This represents 1.1% of its total sales.

Mr Banducci commented: “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 $107 million (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.”

“In summary, while there are many uncertainties in the year ahead, we will continue to be guided by our Purpose, Agile Ways-ofWorking 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,” he concluded.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Woolworths Limited. 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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