Woolworths Group (ASX: WOW), one of Australia’s largest supermarket chains, has reported a significant decline in its net profit after tax (NPAT) for the first half of the 2025 financial year. The company’s NPAT dropped by 20.5% as it struggled with multiple financial and operational challenges, including the impact of industrial action that took place in late 2024. The situation forced Woolworths to reduce its interim dividend by 17%, reflecting the broader pressures of rising operational costs, increased wages, and supply chain disruptions. The weaker-than-expected earnings report has also raised concerns among investors and analysts, potentially leading to downward revisions in stock ratings.
This report delves deeper into the financial results, the factors contributing to Woolworths’ earnings decline, the impact of industrial action, and the broader implications for the company’s future performance in the highly competitive Australian retail sector.
Impact of Industrial Action on Woolworths’ Earnings
The primary factor behind Woolworths’ disappointing financial performance was the industrial action that took place in late 2024. Beginning in November 2024, around 1,500 warehouse workers at four of Woolworths’ key distribution centers went on strike. The strike had a severe impact on the company’s supply chain, disrupting deliveries and causing stock shortages across multiple locations, particularly in Victoria, the ACT, and parts of New South Wales (NSW).
How the Strike Affected Woolworths’ Market Share
- Woolworths’ market share in Victoria dropped by 6.6% in December 2024, as consumers turned to rival supermarkets due to empty shelves.
- The disruption significantly impacted Woolworths supermarkets as well as its liquor businesses, including BWS and Dan Murphy’s. Many stores reported stockouts, affecting customer satisfaction and sales volumes.
- Customers faced significant inconvenience as popular grocery items and liquor products were unavailable during the peak holiday shopping season.
Financial Impact of the Industrial Action
The strike led to a $240 million hit to Woolworths’ earnings, adding to the company’s already existing financial challenges. This one-time impact was compounded by ongoing operational cost pressures, particularly in wage inflation and supply chain expenses.
Woolworths’ First-Half Financial Performance
Despite a 3.7% rise in sales to $35.9 billion, Woolworths missed analysts’ expectations, which had forecast total revenue of $36.0 billion. The company’s earnings before interest and tax (EBIT) also fell significantly, along with other key financial metrics.
Key Financial Highlights
- EBIT: Declined by 14% to $1.45 billion, missing the consensus estimate of $1.49 billion.
- NPAT: Dropped to $739 million, falling short of the $770 million estimate.
- Earnings Per Share (EPS): Decreased by 21% to 60.2 cents, below the expected 62.8 cents.
- Interim Dividend: Reduced by 17% to 39 cents per share, compared to 47 cents per share a year ago.
The weaker performance was primarily driven by the industrial dispute, as well as additional cost pressures in Woolworths’ core Australian Food division.
Australian Food Division: A Key Concern
The Australian Food segment, which accounts for the bulk of Woolworths’ revenue and profitability, recorded a 13% decline in EBIT to $1.39 billion.
Factors Contributing to the EBIT Decline
- Supply Chain Transformation Costs: Woolworths spent an additional $20 million on supply chain transformation, aimed at making its logistics operations more efficient in the long term. However, these costs added short-term pressure on earnings.
- Industrial Strike Impact: The December strike alone led to a $95 million reduction in EBIT.
- Higher Operating Costs:
- Increased wages due to inflationary pressures.
- Rising costs of meat and other input materials.
- Higher stock losses, which further affected margins.
- Shift to eCommerce: Woolworths has been expanding its online grocery business, but this comes with lower profit margins than in-store sales. As more customers choose home delivery and click-and-collect options, Woolworths’ profitability has taken a hit.
- Intensified Price Competition: The company has increased price and promotional investments to stay competitive against Coles and Aldi, which has affected overall profit margins.
Even excluding the one-off impacts from the strike and supply chain investments, Woolworths estimated that EBIT would have still declined by 5%, underlining the broader cost challenges facing the business.
Stock Performance and Market Outlook
Stock Price Trends
Following the earnings report, Woolworths’ stock price has been volatile, reflecting investor concerns over the weaker-than-expected results. The company’s share price had gained 5% in recent weeks but is now expected to face renewed selling pressure due to potential analyst downgrades.
Woolworths vs. Coles: Performance Comparison
In the past 12 months, Woolworths has significantly underperformed its main competitor, Coles Group (ASX: COL).
- Coles’ stock has gained 25%, reflecting strong market confidence.
- Woolworths’ stock has declined by 6.5%, highlighting investor concerns over cost pressures and supply chain challenges.
- Year-to-date, Coles is up 5%, while Woolworths has remained just above breakeven.
Given Woolworths’ weaker financial guidance and persistent cost pressures, analysts anticipate further downward revisions in earnings forecasts.
Analysts Expect Downgrades
Market Reaction and Analyst Expectations
Evans & Partners analyst Philip Kimbers noted that Woolworths’ financial results were weaker than expected, and the company’s sales momentum in early 2025 has not been as strong as anticipated.
- Woolworths reported that sales in the first seven weeks of 2025 increased by only 3.3% year-on-year, missing E&P’s forecast of 3.8% growth.
- The lower-than-expected guidance suggests ongoing challenges in regaining lost market share and improving margins.
Kimbers predicts 5% downward revisions to Woolworths’ FY25 consensus earnings estimates, which could trigger a wave of stock downgrades.
According to Market Index’s broker consensus, Woolworths currently has:
- Three “Buy” ratings
- Eight “Hold” ratings
With weaker-than-expected results and guidance, several brokers may reduce their target prices and shift their ratings towards a more cautious stance.
Woolworths is facing a challenging period, with industrial action, rising costs, and supply chain issues severely impacting its earnings performance. Despite achieving a modest increase in sales, the company’s NPAT, EBIT, and EPS all declined significantly, leading to a reduction in the interim dividend.
While Woolworths remains a dominant player in the Australian supermarket industry, its underperformance relative to Coles and ongoing cost pressures raise concerns about its ability to sustain profitability in the near term. Investors and analysts will be closely watching how Woolworths navigates these challenges in the coming quarters, particularly in managing labor costs, optimizing eCommerce profitability, and regaining lost market share.
If Woolworths fails to improve its margins and operational efficiency, the stock could see further downward pressure, making it a key company to watch in the Australian retail sector moving forward.
