Woolworths Group Limited (WOW) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Woolworths Group F '23 Q3 Sales Announcement. [Operator Instructions] I would now like to hand the conference over to Mr. Brad Banducci, Managing Director and CEO of Woolworths Group. Please go ahead.

Good morning, everyone. Before we start the call today, I would like to acknowledge the traditional custodians of the land on which we meet, the Gadigal People of the Eora Nation, and I'd like to pay my respects to Elders, past, present and emerging. Thanks for joining us for Woolworths Group's Q3 sales results for the F '23 financial year. Joining me this morning are Stephen Harrison, our Chief Financial Officer; Amanda Bardwell, Managing Director of WooliesX; Natalie Davis, Managing Director of Woolworths Supermarkets; Guy Brent, Managing Director of The Woolworths Food Company; from New Zealand, Spencer Sonn, Managing Director of Woolworths New Zealand; and Dan Hake, Managing Director of BIG W. Turning to our Q3 sales performance. We had solid sales across the group in Q3 with 2 thematics playing out; the trend back to pre-COVID customer shopping behaviors and also the impact or the increasing impact of inflation on our customers' shopping baskets. Group sales increased by 8% to $16.3 billion for the quarter, with overall customer spending remaining resilient. However, we are seeing our more value-conscious customers becoming more thoughtful about their discretionary spend, trading in small affordable options, including our own brands and engaging more with our Digital, Rewards and eCommerce platforms to unlock more ways to save. Our customer scores for Q3 were mixed. The ongoing inflationary environment is impacting customer value perceptions. And despite a gradual improvement in our supply chain availability, remains below pre-COVID level. Our teams also continued to adapt to the return to pre-COVID shopping behaviors, including more customers shopping on weekends and in the evening. However, there are many bright spots in terms of customer performance, including the continued strength in BIG W and material improvements in eCommerce compared to the prior year as our team worked hard to meet the ever-increasing customer demand for convenience. Group eCommerce sales for Q3 increased 5.1% to $1.5 billion, driven by a return to growth of 8% in Australian Food. Digital traffic remained strong with over 23 million average weekly visits in Q3, which is an increase of 27.6% compared to the same period last year. In Australian Food, total sales for the quarter increased 7.6% to $12.3 billion, driven by Australian Food retail growth of 7.4%. Australian Food retail items returned to growth from mid-January as the business cycled the impacts of COVID, as well as supply challenges early in the quarter in the prior year. Trade also benefited from the successful Woolies Bricks Farm Collectible program launched during the quarter, as well as a strong customer response to our various value campaigns. Metro Food Stores had a very strong quarter, with sales, originated sales up 27.9%, reflecting new store growth, as well as the recovery in our on-the-go stores as customer mobility has returned. Woolworths Food Company's own and exclusive brand sales grew 9.1% in Q3 with strong growth in Pantry and Chilled Dairy, both growing over 20%, as customers traded into affordable own brand alternatives. At the other end of the spectrum, Macro Whole Foods Company grew at over 30% in Value-Added fresh. Q3 inflation of 5.8% moderated compared to Q2 but remained elevated in the quarter due to industry-wide cost pressure. Improved Fruits and Vegetable growing conditions, lower livestock prices and the cycling of inflation in the prior year, all contributed to the moderation. WooliesX B2C eCommerce increased 8% to $1.2 billion as the business cycled COVID impact in the prior year. Customers' demand for convenience continues to increase, with same-day delivery in our sales reaching record levels in the quarter. Rewards members increased by 200,000 on Q2 and weekly active users on our apps continued to grow materially as more members responded to personalized value. Cartology also had a strong quarter growing by 39%, as it cycled the COVID-related impact on the business in the prior year and supported by the Bricks Farm Collectible program in the period. Australian B2B total sales for the quarter increased 16.4% to $1.2 billion with B2B Food and B2B Supply Chain, both growing strongly compared to the prior year. PFD sales increased 28%, driven by continued recovery in trading of PFD's customers, new customer acquisition and inflation with growth across all major customer segments. New Zealand Food total sales decreased by 8.5%, as sales momentum continued to improve over the quarter. However, item growth was impacted by ongoing supply chain challenges and cost-of-living pressures. Operating conditions in the country remain challenging, but have stabilized following the material weather-related disruption early in the quarter, including Cyclone Gabrielle. Turning to BIG W. Total sales increased 5.7%, with Everyday and Home and Leisure and Toys performing strongly assisted by trading going into Easter. This was offset by lower growth in apparel primarily driven by slower start to seasonal winter sales. Finally, turning to our outlook. In Q4 to date, sales trends have been in line with Q3 with solid sales growth in our Food businesses and growth moderating in BIG W. Looking ahead, we've seen overall inflation in food starts moderate, particularly in vegetables and beef livestock prices in Australia. However, inflation remains frustratingly elevated in other parts of our customers' baskets and we need to continue to work hard to provide our customers with great value every time they shop. Our current focus is on continuing to improve our customer experience, especially value for money and product availability, and we remain cautiously optimistic that Woolworths Group is well placed to navigate and respond to the current trading challenges successfully for all of our key stakeholders, our customers, our team, our suppliers, our community partners and, of course, our shareholders. In closing, I would like to thank our customers for continuing to choose us and our team for their amazing efforts. I will now turn the call over to the operator for questions. To give everyone a chance, can I please ask that you limit it to one question per person and then rejoin the queue with any follow-up questions.

Thank you. [Operator Instructions] Your first question comes from David Errington with Bank of America.

Brad, can I ask -- it's a pretty broad-ish type of question, but it's on how you -- how the market or whatever perceives value perception or what the percentage is out towards value. Your sales are very strong in food, beating expectations quite nicely. So clearly, the customer is seeing your value perception very highly. But we're interested with your exclusive own brands and the strategy there. Coles gives the impression that they are the leader in their exclusive home brands. And I think they called out that their sales are -- 33% of their total sales are exclusive own brands. Last number I thought you gave was around 20% of your sales. Can you give us a bit of an update with regards to on a like-for-like basis, what your exclusive own brands are as a percentage of your sales? And what you're focused on in the next 12 months as the customers become even more value perspective or more value-driven, what you're doing in your stores that will protect you retain share for the value-conscious customer, please? And that's a loaded question. Hopefully, you know where I'm going with that. But there's just the competitors giving the perception that they're going to be better placed to attract and keep the value customer. Can you give a bit of an overview as to what your strategies will be to make sure that you don't lose share in that area?

Thanks, David. Well done for asking somewhere between 5 and 10 questions. So, I'll give it my best shot. Look, every customer cares about getting value, and we are working hard to make sure that we deliver value for each of our customer segments. We break them into 5 key segments, but then those break into subsegment. The segment most under pressure right now for us, David, are our saver families, and I'll come back to those. They really are families that sort of live in the suburban catchment that are under more pressure than they have historically been, primarily actually due to either their mortgage or rent, but it all manifests back into food, shopping and what they do. So, we need to provide value for every customer, but every customer's version of value is slightly different. About on aggregate, 1/3 of value for our customers is made up of price. The other 2/3 of value is made up of a whole range of combinations of health, convenience, range and so on. So, there are many aspects to value. 1/3 of which is price. Now for those saver families, that portion is continuing to grow. So, we're trying to do the right thing for each segment. And we therefore have been very thoughtful on how we arrange our individual stores, core value enough, how we think about our [ CGA ] segmentation by Everyday Rewards. And so we continue to work both of those mechanics and included in that are our own brands. I think it's great for us and our competitors to all be working hard and leveraging our own brands to deliver great value for our customers. So, I think that's just the right thing that we should all be doing. There is as always, though, the fog of these things, David, who's got the biggest series of own brands. If I ask Guy Brent, I think he would say we do. I think it's actually immaterial. What I really think we should be judged on is the quality of our own brands and what they do for our customers. And so I'm particularly focused or we're particularly focused on our own brand NPS. And I can tell you that for the last year, it has grown by every month. And so we are seeing our customers recognize that when they shop our own brands, they get great value. In some cases, that is priced via our Essentials range, whether it's a -- the line that I got most excited about, [ Kintra ] material was 1 kilo rice under the Essentials brand of $1.40 against the market leader at $2.40, growing at 50% in volume. But that's one version of it. But on the other hand, and then we called out in the results, what was interesting to me, our brand that grew the strongest in the last couple of months was Macro, Macro Whole Foods brand and in fresh shortcuts. We saw fresh value-added, we saw huge value. So, it's not whether you got the biggest or not, it's that the brands resonate and they do what we need them to do. And that is certainly what we are seeing and saw in this quarter, but the longitudinal trend is, I think, even more positive. Now on the go-forward itself and David, we are very conscious, and we've called it out in this results announcement that we need to continue to work hard for all of these customer segments. We need to move in line with them and their expectations. So, if I go back to the saver families, our traditional -- our traditional budget family knows how to save. These are a group of people who are under pressure they hadn't been before. And so we need to lean in and go on the journey with them. The characteristics of what they started to do. They are becoming more functional in how they shop, which is why our entry-level own brands are working for them and what -- Essentials is a beautiful example of that because it says what it is. It's a basic essential that you put in the pantry, flour or rice, sugar and so on. So, they're becoming more functional. Interestingly, they are, of course, having more meal occasions at home. You should separate out the size of eating out-of-home from occasions. Occasions are moving back in the home even if the size of the out-of-home segment is still strong. When they shop at home though, in those occasions, they are also going back to traditional family recipes and scratch cooking, so they gain a bit safer. The classic things they're starting to do, of course, are actually what's interesting, the #1 product they're buying is a roast -- provided the family are roast chicken and vegetables. And so they got to get great vegetable prices, which I know Natalie and the team in Supermarkets are working very hard on, and we need to continue to make sure we've got a great range of affordable protein generally by going into chicken versus beef. Interestingly as well, the second most had recipe right now in Australia is the old Spag Bol. We all know except the people are starting to substitute it because of the price of mince into a more value version of that Spaghetti alternative. So, we need to be very focused on going with our customers, meeting their needs in these segments and invariably, we are. So, that's a really long answer to a very important question. Value is key. It is the #1 focus in our business. We are where we need to be right now, but that doesn't mean we don't need to continue to work hard as customers change and expectations change as the going forward. Our own brands have a great role to play, but so do all our other price mechanics, whether it's our in-store price mechanics or the one through Everyday Rewards.

Your next question comes from Michael Simotas with Jefferies.

I'm just hoping to understand the relationship in your business at the moment between comp items, average sales and -- or sorry, comp sales and average prices. So, your comp items declined 0.3%. Your average prices grew 5.8%, your comp sales grew 6.6%. If I do the math on that, it looks like your average price per item grew 6.9% versus inflation, which is 5.8%. That kind of implies that the consumer is trading up in aggregate, notwithstanding the commentary that we've heard around some segments trading down. Can you just talk to that dynamic a little bit and whether you are seeing that in some parts of the business?

Yes, Michael, this in fact, in many ways is a follow-on from David's call. And there is inflation, which we measure on a basket in a normalized running basis and then you are now talking to the average sales price of an item inside of Woolworths store, right. So, I think that's the difference. And the ASP is a bit higher. The ASP is driven by a whole range of things. It's driven by the category mix in the business, which is a very important part of this, I should add, as well as then what our customers are buying in the context of that. So, there's a whole lot going on. And the answer varies by the type of store, the customer segment we're talking to include EMCO. There are many examples in our stores where you're seeing customers trading into great value, elevated ASP prices in our store. We've talked about EMCO before, but there'll be many examples of that, that you'll see where we're actually getting in the trading into our business, and you've seen the benefits there. In our value stores, actually, you will see something quite different happening. But there, actually, what's interesting is, again, even if I go to vegetables, bulk pack start becoming a really important way of driving value, whether it's the great value we deliver through our 1 kilo or 2 kilo potatoes or onions or whatever the case may be. So, you've seen a whole range of moving parts take place there. But it wouldn't be fair to say we are getting as many customers trading into Woolworths as we've seen customers trading across into value aspects of the business, and that's manifest somewhat in that ASP. But there are a lot of moving pieces right now, right as people change the way that they shop keeping inflation.

Your next question comes from Peter Marks with Barrenjoey.

Just on promotions and what you're seeing there in terms of like the level of sales you're doing on promotion now, and I think you made some changes to your promotional program in the first half. So, maybe if you could just talk us through the key changes there and what you're seeing in terms of promotions?

Yes. Peter, I mean promotions got an important part of delivering value for our customers, and that's true across our business, including in our value stores where promotions give customers the ability to actually access and affordable luxury sometimes, so they're more to manage their pantry. There's actually not much to report on this front. We've got a very full program. It continues to be financed and fine-tuned and be more targeted, but the same size basic. The size of the discount has gone up by, I think, maybe less than 200 basis points, but relatively steady and Natalie sort of makes me -- there's not much to report, it really is a very full robust program. It's broadly in line with the penetration, slightly up in terms of the depth of penetration, but not much.

Yes. I think it's broadly stable in terms of customers buying into promotions and we're doing a lot of work around our front end, just to make sure that the customers come into our stores. First of all, we're curating what's on those ends, depending on whether you're in a value store or in an up store. So, the products are very compelling and really trying to make sure that we're putting our most compelling specials on those front ends. I think the other interesting innovation is the work we're doing with rewards actually around in-store activation of boosting offers, which have had a great response from our customers. We did it for back-to-school, and we're just in another promotion at the moment. And so we're using some of our front end to really remind our customers that they should scan their rewards card and that we do offer a lot of personalized boosting offers, which are also great value for our customers. And again, a lot of our saver families, in particular, gravitate towards those rewards offers and yellow specials and our red program, in fact.

I know many of the analysts on this call do tracking price indices between us and our competitors, and we read them all with great interest and actually insight. So, we always appreciate them. But we are very sensitive to price establishment rules. So, you will see us being very cautious. So, you need to look at things over 3 to 6 months on a rolling basis to see the programs. We've just got to be very careful that the price that we're promoting has been established in the market in a sensible manner. So, the price establishment is a big -- an important area for us to keep focus on as we drive price trust. So, you just need to roll up your numbers over time frame to actually see the right trend lines in a comparative sense.

Your next question comes from Lisa Deng with Goldman Sachs.

Brad, just a question on the mix of core value and up stores for the quarter. And if you can also give us a flavor of how they're individually trading with the 3 category.

Lisa, yes, that's a very detailed question. We can -- I'll turn to that to talk at a high level. But essentially, they're all trading with slightly different demographics, as I said to you. You're getting more trading into the up stores and more trading into value and value stores. And so the theory of what we're trying to do with core value is working. We're trying to be relevant to each customer community and that is clearly working. What's interesting to us and within that is actually, some stores will be changing the nature of what they are at the saver families and some of the segments that we traditionally would have set a core, they're starting to become more value like in their characteristics. So, we need to continue to update our definitions and use them. So, it will never become a reporting segment or never say never, but it is not a reporting segment because of our need to continue to adjust and dynamically think about what source fit where within that segmentation.

Yes. If I can add color around some of the trends we're seeing in our value stores and our up stores. So, Brad talked about all customers are seeking value. We're definitely seeing a need for affordable protein and that's coming through with trading into poultry, also trading into our crumbed range. So, Australians love chickens [indiscernible]. That range is growing at 10%, mince and sausages. And certainly, that trading into value is stronger in our value stores. We're also seeing a stronger trend towards our own brand products that Brad has talked to, rice, pantry in particular, oil and also in the dairy cabinet, that's definitely coming through strongly in our value stores. And in our up stores, we're seeing the dinner occasion continue to grow and people trading in from out-of-home into in-home entertainment and in-home meals. So, the dinner occasion is products like microwaveable rice growing strongly in our up stores. Another example is our coffee bean. So, a kilogram pack of coffee beans, which has really picked up in growth in Q3 as many customers switch from buying coffee out-of-home to actually making coffee in the home. So, we're seeing a lot of growth in those affordable indulgences or little luxuries and particularly coming through in our up stores.

David, for you. We have over 40% volume penetration of own brand in value stores to give you a sense of it in the long-life category. So, you'll see the flexing. Affordable luxuries, by the way, are working across the group. So, you'll see that working, whether it's core value enough. All of our customers do need an affordable luxury and it's really important to them. So, the trends to premiumizing pizza and so are really important. In fact, I should say that our saver families, one of their favorite meals are the premium pizzas. So, you're seeing premiumization as families start eating more in the home.

Your next question comes from Adrian Lemme with Citi.

Just following on this topic of value perception. We're seeing numerous social media and news articles, and I'm sure you've seen these where people walk into a supermarket and spend $50 and get only a handful of items. And it seems like these are mostly branded products, which is probably not all that fair on the retailer that it's impacting your customer satisfaction scores. So, just wondering how you're working with suppliers to bring the inflation rates down. Are you, for example, scrutinizing these price requests a little harder now or taking other measures to soften the blow on your customers, please?

Look, our average sales price is about $4.50. So, you can't get great value out of $50. So, shop Woolworths, I would say, because you're clearly going into the wrong stores right now. So, we look forward to having you in our stores. And so that's basically the average amount spent in one of our stores, and it's about 10 to 11 items the average customer buys on a shopping experience. We try to make sure that we're competitive at every price point. And whether it's trading infill specialty into Woolies as Natalie is talking about or thinking about that context in a value store and what the alternatives are at the front of the store, in particular, in the life of fruit and veg shop. And we just got to continue to work hard on that. We engage, as you might imagine, with our suppliers, and we certainly have very good conversations around price increases from them to us because we're cognizant of what the impact is on our customer, and we are the agents of our customers. And so those are pretty robust conversations. We do have to be and we are very sensitive about being compliant with the grocery code in terms of how long that period goes for and what happens. So, I think out of 100 cents in the guide that we asked for eventually we agreed to about $0.70 on the dollar right now. So it's about in that order of magnitude, but each one is looked at in its merits. And in many cases, the truth is our suppliers do have material cost increases. If you look at some of the challenges, certainly, we're going to see freight rates coming down, although, that's more out of Asia than Europe right now. But there has been that issue. There are the elevated commodity prices, grains, oils and so on, and those are legitimate. So, we do need to take those into account. There's no simple, easy answer. But to your point, the only price that we can actually be confident on is our own brand pricing. So, we do need to continue to use that as an important way to make sure the customer always has the choice in the shelf.

Your next question comes from Shaun Cousins with UBS.

Just a question around Australian Food and online. Online grew at 8% and your stores were up 7.4%, and it was pleasing, I guess the click and collect is still increasing, so there's less of a margin headwind. How much of this faster growth in online was due to some of the start-up delivery businesses sort of failing? How much was to maybe the extent that consumers are still willing to pay a premium for convenience? And maybe just how does this growth in online line up with what Steve Donohue Endeavour said this morning, which is where their retail sales are down as the consumer is willing to get in the car and drive to the store. I'm just curious around what's driving the strength of your online business, please?

Yes. I'll answer at a high level and I'll turn over to Amanda Bardwell [indiscernible]. You do need to shop at our Direct-to-Boot service because it's no longer click and collect, it's Direct-to-Boot, and in fact, and while our Direct-to-Boot is doing very well, the 710 stores or something thereabout, I'm sure we could find one under one of your various routes. Actually, what's interesting is the pickup from our counters was deeply negative. It was all of our pickup growth, which offset the negative growth at picking up at a service desk was in Direct-to-Boot. And I think the reason I mentioned that is, and it's continuing to hold Direct-to-Boot as a very important part of our business is the convenience that the customer is looking for, whether I'm picking up at a store or I'm getting it delivered to me. It is all about taking friction out and convenience out. But the trend line is if you just normalize for COVID, we're back to what we had seen pre-COVID in terms of the way customers want to shop and what they're looking to shop and I'll turn it over to Amanda to give some more color to our business. I would just add that the impact and that we're very sorry to seen what happened with Omicron but that was post the end of the quarter. That's -- we're not benefiting from the competitor in the sense. It is more what the customer is looking for. But over to you, Amanda.

Yes. Thanks, Brad, and Shaun look, I think when you're looking at the online result important, as Brad called out, just to reflect on what was happening last year with Omicron, that really had an impact on our ability to serve customers in online. So, we really considered very carefully what services were available in January and through that quarter 3 period. And then online was also deeply impacted by availability in WA and in the floods in Queensland. And so we have got that sort of cycling impact. And then as Brad called out, what we really saw is customers starting at the beginning of this calendar year and going all the way back to the way they previously thought about shopping, which is convenience becomes really important, important also for saver customers that Brad has been talking about. That's a big portion of our saver families who really benefit from shopping online. It gives them a sense of control and Direct-to-Boot is a great way for them to be able to have that great sense of control, the great experience, but also to be able to manage their budgets. And then on the convenience spectrum, same day and delivery now that's growing very rapidly for us. So, the 3 key drivers are Direct-to-Boot and same day, along with that sort of 2-hour service. But all of that really started quite honestly, at the beginning of this calendar year. Coming back to school, we had a great start, and it's just continued on.

So, the heart of online for us is one of the channels that our customers shop that will full shop our stores in online. We look at the size of the active online customer database. And that number we talked about it last quarter has been continuing to grow. It was the infrequent shopper who changed. And that trend has just continued, I think, Amanda to accelerate throughout the quarter.

Yes.

We look forward to the Direct-to-Boot at Balmain sometime soon.

No, I think it's fair touche.

Your next question comes from Bryan Raymond with JPMorgan.

Just interested in the recent -- if there's been any change in recent months, your competitor recently called out that in recent months, they've seen some of this value shopping behavior increase meaningfully for them. Premium range is underperforming. You've talked to macro and some of those trends already. So I take your point around those. But just interested in if there's been a more recent shift from, say, the February results are now around customer behavior that's part of what we're talking about today. It seems like more of a focus on value and offering that value into shoppers. So, just trying to get a bit of color around the recency of some of these trends.

Yes, Bryan, I mean we're 4 weeks into the next quarter, and we're all looking at these numbers last night looking at the trend lines, you're always so nervous today before a sales announcement. They have been -- each period is unique, but this has been quite particularly different. It's been a late Easter with school holidays backing into an Anzac Day. And so it's been quite an interestingly complex period to look at. In truth and to say, we see the trend line continue. People are looking for value. They're slowly changing what value means to them. So you do see some of those trends continuing, but it's -- I wouldn't like to overplay it. It's been relatively stable and consistent in the context of what you can look at over a pretty unusual period, which you want to look for like-for-like months.

Your next question comes from Craig Woolford with MST Marquee.

I just wanted to explore the issue of food inflation, mainly around packaged groceries. There's some of your commentary would suggest that it's easing off, but it seems like more a message around the baseline effect. Over recent results, you've talked to the magnitude of the price rise request back in August, you said it was 5x the usual level in February. It hadn't really dropped off much because there was a Christmas lull but making place in February. What are you seeing now? And what's your outlook for packaged grocery inflation?

Look, the number of requests has -- did reduce materially in April. So, that's the big one. We do have that in effect to change freeze, which is very hard early the year, so it did come back and does have come off and has come off subsequently quite materially. So hopefully, that is a positive aspect. But as I said, there are still many relatively meaningful requests coming through often on the back of understandable commodity price pressure. So, it's why we had this caveat, we do see it moderating. But each product, each category will have a relatively different story. That is the major difference between last year where everything was going up. Now that's not true. But you see very understandable pressure in dairy as we've talked about or bread. Just look at bread in the last couple of weeks of material movements in the price of bread on the back of pressure through grain. So yes, it is larger, but we'll wait and see and continue to work through it.

Your next question comes from Ben Gilbert with Jarden.

Just interested, Brad, or Natalie what you're seeing around loyalty. It looks like you've grown your share for the quarter and maybe even the share gains accelerated towards the end of the quarter based on comments to the start. Do you think that the investment you guys have put into supply chain, the rewards, the extra, is starting to actually drive some sort of tangible advantage that seen your loyalty share at main shops, et cetera, rise because it seems like you had a pretty good end to the period from a share perspective.