WES half year EPS up 33% $1.02WOW half year EPS up 6.9% to...

WES half year EPS up 33% $1.02
WOW half year EPS up 6.9% to $0.95

Signs of desperation in aisle war

John Durie From: The Australian February 26, 2011 12:00AM

IN a market where industrial company earnings are going backwards, Woolworths is still in positive territory, but the trends are all negative.

Outgoing boss Michael Luscombe was at pains to argue that momentum would return and that leadership was still his, but frankly, the numbers don't show it.

For Woolies shareholders, the best news is that while the company's returns are falling, earnings per share is up 6.9 per cent against an industrial company average of 3.8 per cent.

Macquarie's Neale Goldston- Morris notes that analyst estimates of industrial company earnings growth has slumped from 17 per cent six months ago to just 3.8 per cent today and in a month will fall into negative territory.

The accompanying table shows clearly that industrial companies are the laggards of the earnings season, underlying the parlous state of the economy outside the resources sector.

Woolies chair James Strong made no comment on the speculation around Luscombe's departure date -- tipped for year's end -- and neither did the incumbent.

Luscombe talked up the recovery in momentum in a presentation overloaded with theatrics, right down to the inclusion of the leadership team, to show the company was indeed bigger than one person. He introduced heir apparent Greg Foran as the person "in charge of just about everything" and sung the praises of Big W boss Julie Coates, who reported a 17 per cent fall in earnings. This, of course, was materially better than the things at Target.

Woolies has 21 per cent more supermarket space than Coles, but the latter increased earnings per square metre by 22 per cent for the last half, against 3.7 per cent for Woolies. The public perception is that Coles is back in the game on price.

Over the past five years, Woolies sales have increased 16.2 per cent in the first half of 2007, 8.9 per cent in 2008, 8.1 per cent in 2009, 6 per cent in 2010 and 3.8 per cent in 2011. Earnings and returns on capital follow the same trend while the Coles numbers from a low base are all heading up fast.

Woolies is showing signs of desperation by spending $340 million on the Cellarmasters business. It earned just $35m and adds little to the dominant brand in the game, his own ship Dan Murphys, but instead will provide a short-term boost to earnings.

For a business that rightly prides itself on making long-term decisions, this was a strange move, but Luscombe is promising a series of initiatives to change perceptions on momentum.

He, like most chief executives, welcomed in concept the government's decision to transition in carbon pricing, starting with a fixed price. But he said it all depended on the details. Given the company's energy costs run to $200m a year, every cent counts.

Woolies is a clear market leader on sustainability having cut carbon emissions in its premises by 13.5 per cent last year and by 9.4 per cent on its trucks en route to 40 per cent cuts by 2015.

Around August, his hardware expansion will step into gear with projected start-up losses of $25m, which he bravely predicts will be partly offset by increased poker machine profits next year.

So far, Luscombe claims he and Coles have closed the gap on market price leader Aldi, but he needs more than talk to change perceptions in the battle with Coles.