Woolworths shares plunge as COVID costs bite

Woolworths Group (ASX: WOW) shares dropped by more than 9 per cent this morning after the retailer's CEO Brad Banducci described the current period as "one of the most challenging halves we have experienced in recent memory", citing direct COVID costs of $150 million for the Australian Food division.

The group is also forecasting elevated operating costs of $60-70 million because of the indirect disruption to stores and distribution centres from operating in a COVID environment.

The group estimates EBIT of $1.19-1.22 billion, which is at least 20 per cent lower than the FY21 result ex-Endeavour Group - a drinks and hotels business that was spun off through a demerger in June.

Banducci says the COVID Delta strain has had far-reaching impacts on the business, including its end-to-end stock flow and operating rhythm.

Food sales growth has been positive year-on-year and "strong" on a two-year basis, but in the second quarter it moderated following the easing of restrictions in NSW and Victoria.

"We are pleased with our sales growth compared to the overall market and our customer NPS scores have remained strong," he says.

"As we head into the key Christmas trading period we have a good in-stock position and positive trading momentum, and our team is working hard to ensure that our customers have access to all they need to make this a special Christmas.

"However, the ongoing material costs of operating in a COVID environment has impacted our expected earnings in H1. COVID has had a significant impact on costs, even more so than last year due to the combination of both direct COVID-related costs, together with the indirect impacts from disruption caused by COVID."

This impact includes significant disruptions across the end-to-end supply chain, and the material inefficiency this causes in the group's stores, distribution centres and transportation. This relates not only to Woolworths supermarkets in Australia, but also the group's Big W business.

Despite an improvement in sales for Big W in the second quarter, its first half EBIT is expected to be $20-30 million, versus $133 million for the comparable period in FY21.

"Despite the various disruptions, we have made good progress activating our strategy and have continued to selectively invest in building out our customer proposition and broader retail ecosystem," Banducci explains.

"As customer behaviours begin to normalise and COVID-related supply volatility reduces, we expect an improvement in our underlying operating performance and we will provide a more detailed update on the outlook for the remainder of F22 at our H1 results in late February.

"In addition, to recognise the significant efforts of all the Group’s front line teams across Australia and New Zealand, our H1 results will also include a special Group Team Christmas Thank You bonus payment of $35 million to $40 million as previously disclosed."

Meanwhile the group's New Zealand supermarkets, branded as Countdown, have witnessed strong sales growth, "benefitting from extended lockdowns and higher inflation in the country", according to Woolworths Group.