Woolworths (ASX:WOW) share price lower on third quarter sales update

The Woolworths Group Ltd (ASX:WOW) share price is on the move on Thursday morning following the release of its third quarter update…

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The Woolworths Group Ltd (ASX: WOW) share price is under pressure this morning following the release of its third quarter update.

At the time of writing, the retail conglomerate’s shares are down 2% to $40.59.

How did Woolworths perform in the third quarter?

For the three months ended 31 March, Woolworths reported a 0.4% increase in group sales to $16,566 million. This was particularly impressive given that the prior corresponding period benefited greatly from COVID-19 related panic buying.

During the three months, Australian Food sales were down 0.7% on the prior corresponding period to $11,092 million. It was a similar story in New Zealand with sales falling 6.9% in local currency to NZ$1,792 million.

Offsetting this were strong performances by its BIG W, Endeavour Drinks, and Hotels businesses.

BIG W reported an 18.3% increase in sales to $1,024 million, Endeavour Drinks delivered a 6.3% increase in sales to $2,393 million, and the Hotels business reported an 11.5% jump in sales to $390 million.

Another big positive during the quarter was its ecommerce business. Group ecommerce sales increased 64.2% during the third quarter to $1.3 billion.

Management notes that in Australian Food, WooliesX eCommerce sales increased by 90.5% to $878 million with penetration of 7.9% compared to 4.1% in the prior year and 7.7% during the first half.

Management commentary

Woolworths’ CEO, Brad Banducci, was pleased with the quarter, noting that it was a tale of two halves.

He said: “There were two very distinct trading periods in Q3; the first seven weeks before we began to cycle COVID and the second six weeks as we cycled the peak growth of the prior year. Group sales growth was strong in the first seven weeks of the quarter. For the final six weeks, food and drinks sales declined on the prior year as expected, BIG W remained strong, and Hotels’ sales growth started to recover as it cycled closures at the end of Q3 in the prior year.”

“Despite the volatile trading over the quarter on a one-year basis, two-year average growth rates in Australian Food, Endeavour Drinks and BIG W remained above-trend,” he added.

Outlook

As expected, trading conditions are volatile and the company will soon cycle the elevated sales period from May and June 2020.

Mr Banducci explained: “Turning to current trading and outlook, sales growth for the first three weeks of April remained volatile and impacted by prior year growth rates and the timing of public holidays.”

“In Australian Food, total sales were broadly flat compared to last year. This reflects the cycling of mid-single digit sales growth in April last year in comparison to double-digit sales growth in May and June.”

It is a similar story for the Endeavour Drinks, New Zealand, and Big W businesses.

“Endeavour Drinks sales in April remained above last year but are expected to slow when we cycle growth of over 30% in May and June. While in New Zealand, sales growth was materially negative in April, cycling growth of over 20% in the prior year. BIG W sales growth has also slowed in the first three weeks of April, cycling growth in April last year of approximately 20%,” he added.

However, the Hotels business, which was negatively impacted by lockdowns, is expected to perform comparatively strongly.

“We continue to expect sales to decline over the March to June period for all businesses other than Hotels where Q4 F20 sales declined 86.3% on a normalised basis. “

Endeavour Drinks demerger

Woolworths advised that the Endeavour Group demerger remains on target for late June.

Subject to board and regulatory approval, demerger documentation is expected to be released in mid-May.

Dan Murphy’s Darwin Airport development update

In a separate announcement, Woolworths revealed that its plan to open up a Dan Murphy’s store at Darwin Airport has been terminated following a review. This news could be weighing partly on the Woolworths share price.

Mr Banducci said: “The insights and recommendations within the Gilbert Review will serve to strengthen Woolworths Group and Endeavour Group’s future stakeholder engagement. More importantly, it will create a platform for working better together in our engagement with Aboriginal and Torres Strait Islander peoples.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Woolworths Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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