Woolworths Group flags $340m hit from COVID-19 costs and pub closures

After Coles Group (ASX: COL) reported a a 12.9 per cent rise in third quarter sales yesterday, rival grocery and drinks purveyor Woolworths Group (ASX: WOW) has reported a similar jump in the first three months of 2020.

Woolworths reported an 11.3 per cent rise in sales to $11.17 billion for its Australian supermarkets, while the percentage increase was even more pronounced for its Countdown stores in New Zealand, up 14.8 per cent at $1.93 billion.

After a slow start to the quarter, the company's Endeavour Drinks business - known for such brands as Dan Murphy's and BWS - saw very strong sales growth in March as Australians drowned their sorrows in response to the crisis. 

But the boom times have come at a cost which is unlikely to go away any time soon, while sales across the group have moderated in April with food sales growth in the mid-single digits and drink sales growth back to pre-coronavirus levels. 

WOW has today flagged incremental costs of $220-275 million for the fourth quarter relating to the temporary employment of approximately 22,000 new team members, additional warehouse capacity, and scaling up online, as well as ongoing security, cleaning and personal protective equipment (PPE) costs.

The group's hotels business has taken a hit as well after social distancing rules meant licensed venues needed to be shut down. WOW expects its 500-plus hotels will continue to run at a total monthly loss before interest and tax of $30-35 million, as they have been in March and April as well.

If pubs remain closed for May and through June, this would equate to a loss of at least $120 million, taking the total negative hit from COVID-19 to $340 million for FY20 in a best case scenario.

Woolworths Group CEO Brad Banducci says the last four months have been one of the most challenging periods in the company's history.

"Our team is doing an incredible job of responding to these unprecedented challenges and I want to thank them for their amazing efforts," he says.

"I am proud of the way we have all supported each other with humanity and a commitment to doing the right thing. The COVID-19 crisis is far from over, but we are hopeful that we are now settling into a 'new normal' and are confident that we will get through this together.

"Group sales growth for the quarter was strong across all businesses apart from Hotels following the mandatory closure due to Government restrictions in late March."

He says pantry loading and consumers eating more at home have been the drivers of material increases in food sales since late February.

"Endeavour Drinks sales also surged towards the end of the quarter. While already trading well in January and February, BIG W's sales growth also accelerated in March, although the sales mix shifted towards lower-margin everyday needs and leisure.

"Sales and safety were supported by a material cost investment in team hours, supply chain and personal protective equipment (PPE).

"Our team have played a critical role during these unprecedented times and while the outlook for the rest of the financial year is uncertain, we remain in a strong operational and financial position."

The group also announced three Big W stores had been closed in the quarter as part of an ongoing restructuring of the discount change, while the AFR reported yesterday suppliers were told a fourth store would be closed at Calamvale in Brisbane.

Updated at 10:04am AEST on 30 April 2020.