Get your margins worth
1H23 RESULT
Need To Know
- EBIT $1.64bn beats market at $1.57bn with margin expansion +78bp
- Margins bounce back at BIG W to almost 5%, ahead of market
- Inflation still expected to puff up sales in 2H23, modest volume declines
An above-market result in terms of improving EBIT margins at Australian Food and BIG W. COVID-19 costs are leaving, but higher wages, energy and supply chain costs are hanging about. Overhead costs of $250m in FY23f will also drag.
Food. Unwinding of COVID-19 costs contributed to Australian Food EBIT margin improving 78bp to 5.9% in 1H23. EBIT increased 18.2% to $1,439m thanks to higher gross profit margin. Excluding COVID-19 costs, the cost of doing business increased 31bp reflecting pressure on wages, new stores and more IT spend. Total store sales growth of 5.6% in 2Q23 but the supermarket industry growth rate of 7.9% for the December quarter and Coles’ growth of 8.0% suggest some relative softness in WOW. However, the 3-year growth in comparable store sales for WOW and COL is the same.
WOW said trading in the first 7 weeks of 2H23 showed food sales growth of 6.5% with inflation doing most of the lifting while volume is slightly down. It is a similar theme in New Zealand Food.
BIG W. Sales increased 15.3% in 1H23 and EBIT jumped to a much more normal looking $134m after COVID-19 damaged the prior year result. The good news was the improved EBIT margin at 4.95% which was well ahead of what the market had expected.
Overheads. WOW said 1H23 overheads were $85m and would reach $250m in FY23 due to recent costs of acquisitions.
Investment View
Inflation is certainly making its mark in sales growth, and it may persist for most of 2023. But it is also affecting the cost of doing business as wages, energy and supply chain costs are lifting. The increasing EBIT margin at both Australian Food and BIG W suggests WOW is on top of the cost effort, helped by the removal of COVID-19 costs. The softer sales indication should be temporary.
WOW is ahead of COL in terms of its major capex programs, and we may be seeing the early benefits of that spending.
The better margin performance should encourage the market to upgrade earnings forecasts by low single digits.
Figure 1: 1H23 Result
Stock Overview
Share Price
Company Overview
WOW is Australia’s largest supermarket operator with 1,076 sites. It has 184 supermarkets in NZ. The BIG W department store network has 176 stores in Australia.
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