Freedom from lockdowns will coincide with a slow down in supermarket sales as pantry hoarding and panic buying are unnecessary. Woolworths’ share price has benefitted from the pandemic distortion of normal consumer behaviour but is now exposed to a gradually normalising economy.
WOW’s 1Q22 sales grew 7.8% on the back of good execution through lockdown periods in NSW and Victoria. The acquisition of PFD Foodservice also added to the result.
WOW’s online sales soared through the period to $1,879 million, an increase of 53.5% over the same period last year. That now represents 12.4% of group sales.
As with previous lockdown periods, COVID-related hygiene costs were prevalent at $102 million. Since the Delta outbreak began, over 22,000 WOW team members have been required to isolate at some point, explaining why about half the COVID costs are due to additional team member expenses. WOW has flagged a $35-40 million Christmas staff bonus in 2Q22f as a well-deserved ‘thank you’ for their efforts.
Higher inflation is likely to be a feature in FY22f. WOW’s reported inflation rate (excluding tobacco and fresh fruit and veges) was -2.9% in 4Q21 but reduced to -1.6% in 1Q22. The change in this metric indicates that inflation is increasing and this trend will persist. The extent of this change may depend on how much of the recent supplier price rises is passed through to WOW’s customers.
BIG W’s sales fell 18% in 1Q22 as 91 stores or 52% of its network was either closed or affected by lockdowns in the period. Online sales increased 124% to $233 million. The end of lockdowns will see sales pick up quickly for BIG W but we think margins may be under pressure in 1H22f from additional discounting.
Investment view
Consensus forecasts for WOW place the FY22f PE ratio at 29x which we think is too high given a slowing sales environment. We are looking for comparable sales growth to slow in the next few months as evidence of this trend.
We have raised our recommendation to Hold from Sell following the recent share price dip but we still anticipate WOW will underperform the broader market.
