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Woolworths share price on watch amid strong Q3 sales growth

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

This follows the release of the retail giant’s third quarter sales update this morning.

Woolworths share price on watch amid solid sales growth

Group sales up 9.7% over the prior corresponding period to $15,123 million Australian Food sales up 5.4% to $11,432 million Group ecommerce sales up 33.4% to $1,456 million BIG W sales down 3.5% to $989 million COVID costs down 51.8% quarter on quarter to $66 million

What happened during the quarter?

For the 12 weeks ended 3 April, Woolworths reported a 9.7% increase in sales from continuing operations to $15,123 million.

Playing a role in this growth was its key Australian Food business, which reported a 5.4% increase in sales to $11,432 million thanks to 4.4% comparable sales growth.

This reflects Woolworths Supermarkets quarterly sales growth of 2.4% to $10 billion, Metro Food Stores sales growth of 7.3% to $241 million, and WooliesX B2C eCommerce sales growth of 38.1% to $1.1 billion.

It was a similar story for the New Zealand Food business, which reported a 4.2% increase in sales to $1,736 million. This was underpinned by a 3.1% increase in comparable store sales and favourable currency movements.

The highlight of the quarter was arguably the Australian B2B business, which delivered a 217.3% increase in sales to $995 million. This side of the business includes the PFD business and its share of revenue from the spun off Endeavour Group Ltd (ASX: EDV) business.

Conversely, the lowlight of the period was the struggling BIG W business. It reported a 3.5% decline in revenue to $989 million after recording a comparable store sales decline of 3.4%.

Finally, Woolworths revealed that its total COVID costs more than halved quarter on quarter to $66 million. This represents 0.4% of sales, compared to 0.9% of sales in the second quarter. The release shows that this cost reduction reflects lower cleaning, PPE, and team costs.

How does this compare?

The good news for shareholders is that this sales performance appears to be ahead of expectations.

For example, Goldman Sachs was forecasting total sales growth of $6.4% to $14.7 billion for the three months, whereas Woolworths reported a 9.7% increase to $15,123 million. This could bode well for the Woolworths share price today.

Management commentary

Woolworths Group CEO, Brad Banducci, was pleased with the quarter but notes that customer satisfaction metrics have taken a hit. He said:

“Despite the unfailing efforts of our teams, high levels of COVID-related team absenteeism and the disruption to our broader supply chain resulted in inconsistent customer shopping experiences and negatively impacted our customer metrics. Pleasingly, in recent weeks, we have begun to see more stability across the Group but store stock service levels remain below normal levels.

Group sales growth for the quarter was strong as a return to COVID-related shopping behaviour in the early part of the quarter led to higher in-home consumption in our Food businesses along with rising food inflation.

We have not yet seen a notable change in customer shopping behaviour but remain focused on providing our customers with great value for money. The timing of Easter negatively impacted reported sales growth but given the current volatility and COVID impact in both periods, we have not reported Easter-adjusted numbers.”

Outlook

While no guidance has been given for the full year, Mr Banducci revealed that the fourth quarter has started positively. He explained:

“Trading momentum in Q4 to date has continued in Australian Food and BIG W with strong Easter seasonal trade. In New Zealand Food, we are seeing some signs of stabilisation in the operating environment but the disruptions caused by COVID are expected to impact H2 EBIT with a forecast range of NZ$120 – 140 million (a decline of 16-28% on H2 F21). The expected reduction in profit is largely a function of higher COVID costs associated with keeping our customers and team safe and minimising disruption to our supply chain.

“For the remainder of the second half, we are focused on returning to a more stable operating rhythm and delivering consistently good shopping experiences for our customers. Despite the continued business disruption, direct COVID costs have continued to moderate (0.4% of sales in Q3) as we carefully look to reduce costs in areas where no longer required. Our mix of COVID costs has shifted with lower costs on the Eastern Seaboard and higher costs in New Zealand and Western Australia.”

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