Woolworths share price on watch amid first-half earnings beat

The market may be saying wow to this retail giant's strong first-half result…

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Key points

  • Woolworths has released its half-year results and reported strong earnings growth
  • This was driven by solid top line growth thanks partly to food inflation
  • The removal of COVID costs has given the retail giant's margins a big boost

The Woolworths Group Ltd (ASX: WOW) share price will be one to watch on Wednesday.

That's because the supermarket giant has just released its half-year results and reported strong earnings growth.

Woolworths share price following results release

  • Sales up 4% to $33,169 million
  • Earnings before interest and tax (EBIT) up 18.4% to $1,637 million
  • Net profit after tax up 14% to $907 million
  • Fully franked interim dividend up 17.9% to 46 cents per share

What happened during the half?

For the six months ended 31 December, Woolworths reported a 4% increase in sales to $33,169 million.

This was driven by a 2.4% increase in Australian Food sales, a 17.4% jump in Metro Food sales, a 15.3% lift in Big W sales, and a 23% jump in Australian B2B sales, which offset weaker sales in New Zealand Food and the WooliesX online business.

Woolworths' key Australian Food business benefited from food inflation. It continued to rise during the half due to industry-wide cost pressures, with Q2 average price growth of 7.7%, marginally higher than Q1 growth of 7.3%. Long Life prices continued to increase but some Fruit & Vegetable prices moderated as supply improved.

The company's EBIT grew at a much quicker pace of 18.4% to $1,637 million during the half. This reflects improvements in its cost of doing business (CODB) margin, which declined 29 basis points largely due to the non-recurrence of direct COVID costs of $239 million that were incurred in the prior corresponding period.

This ultimately led to Woolworths reporting a 14% jump in net profit after tax to $907 million, allowing the board to increase its dividend by 17.9% to 46 cents per share.

How does this compare to expectations?

The good news for the Woolworths share price today is that this result appears to have come in ahead of expectations.

According to a note out of Goldman Sachs, its analysts were expecting group sales growth of 3.5% and EBIT growth of 12%. The market was also expecting a fully franked interim dividend of 43.9 cents per share.

Woolworths has beaten on all metrics with 4% sales growth, 18.4% EBIT growth, and its 46 cents per share dividend.

Management commentary

Woolworths Group CEO, Brad Banducci, was pleased with the half. He commented:

Our first half result benefitted from a focus on improving our customer shopping experience, restoring our operating rhythm, the non-recurrence of material COVID costs in the prior year and strong seasonal trading. Despite continued supply chain challenges during the half, most customer metrics improved, with Customer Care a highlight and Group VOC NPS increasing on Q1 and the prior year.

Cost-of-living pressures are being felt by our customers due to industry-wide inflation and helping all our customers get their Woolies worth remains our number one priority. A focus on affordability and availability, and an inspirational Christmas resulted in Group H1 sales growth of 4.0% (3-yr CAGR: 7.5%) and EBIT growth of 18.4% (3-yr CAGR: 7.1%).

Outlook

More good news for the Woolworths share price today is that the company has had a strong start to the second half. During the first seven weeks of the half, the company has achieved the following sales growth:

  • Australian Food sales up 6.5%
  • New Zealand Food sales up 6.3%
  • Big W sales up 9.7%

And while the company's earnings are not expected to grow as strongly in the second half, a solid full year result appears to be on the cards. Mr Banducci concluded:

In summary, sales momentum has continued to be solid in the half to date and the operating rhythm of our business continues to improve. However, EBIT growth in H2 will be below H1 as we cycle a more normal second half. We will continue to balance the needs of all our stakeholders, including providing our customers with great value; treating our suppliers fairly; offering competitive pay and a positive working environment for our team; continuing to play our part in creating a better tomorrow; and delivering sustainable financial results for our shareholders.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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