Kate Perry

Trans-Tasman grocery giant Woolworths recovered from the "hiccup" caused by industrial action in the first half of the year, with the New Zealand division posting earnings of $178.2 million for the year ended June 24.

At a group level, Woolworths reported a 27.5 per cent rise in net profit, to A$1.3 billion. Earnings before interest and tax rose 22.6 per centto A$2.11 billion.  A final dividend of 39c a share was declared, bringing the total dividend for the year to 74c a share, up 25.4 per cent on the previous year.

Woolworths entered New Zealand in late 2005 through the $2.6 billion acquisition of Progressive Enterprises, which owns Foodtown, Countdown and Woolworths.

It faced a tough induction to the New Zealand market, with prolonged industrial action in the first quarter of the financial year, when about 600 staff were locked out after disputes over pay parity and collective employment agreements.  Chief executive Michael Luscombe described the industrial dispute as a hiccup and said the New Zealand business had recovered from the disruption.  "Our operation levels, all the metrics in the business, have returned to normal post the industrial action that we had in quarter one," he said yesterday.

The New Zealand results were very pleasing, and the business was well positioned for growth.  Sales for the year hit $4.5 billion.  Meaningful comparisons with the previous full year were not possible, as the New Zealand results were included in Woolworths' accounts only from November 2005.

Mr Luscombe said the results from the second half of the 2007 fiscal year, which exclude the impact of the industrial action, provided a clearer picture of how Woolworths was performing in New Zealand.  Sales in that half were up 4.8 per cent, and earnings before interest and tax were up 12.6 per cent.

The outlook for the 2008 fiscal year was positive.  "I'm happy to say that our experience in the first few weeks of 2008 financial year has maintained the growth that we had in the latter part of the year."  He said Woolworths was a long way into its plan to reposition the business in New Zealand.  Changes so far include the introduction of a Home Brand suite of products, integrating systems in line with Australian operations and changing buying systems.  "We've improved the buying terms in New Zealand and we've invested that money into much lower prices and better value for the New Zealand consumer".

The first New Zealand store using the Woolworths system would be online before Christmas, with the introduction of other systems-integrated stores to follow.  "This and many other initiatives are putting the NZ business in a great position for future growth."

Woolworths is still pursuing a general merchandise presence in New Zealand.  It has appealed against a Commerce Commission decision denying its application to have the right to bid for The Warehouse.  Mr Luscombe said a date of October 23 had been set to hear the appeal.  He said that depending on what happened with The Warehouse, as well as the general merchandise asset of rival Coles - which Woolworths is also interested in - the group may look at returning some money to shareholders next year.

He forecast continued profit growth for the 2008 year.  "Net profit for fiscal 2008 is expected to grow in the range of 19 to 23 per cent."

New Zealand consumers spent more than $1 billion at Woolworths' supermarkets in the third quarter, as the Australian retailer works toward grabbing a bigger chunk of the Kiwi market.

The group, which is waiting to hear if the Commerce Commission will clear it to bid for discount retailer The Warehouse, reported yesterday a 3 per cent rise in sales at its New Zealand supermarkets for the 13 weeks to April 1.

Sales hit $A1.022 billion ($NZ1.15 billion) for the period compared to $A992 billion for the same time the year earlier.  In New Zealand-dollar terms sales were up 4.9 per cent on the comparable period.  Total third-quarter sales for the Australian group were up 8.8 per cent at $A10.559 billion.

Chief executive Michael Luscombe said Woolworths knew when it bought its New Zealand business in 2005 it would take two to three years to get to a point where it was truly competitive.  "We're on the right track, but we've still got a lot of work to do," he said yesterday.

Woolworths entered New Zealand in late 2005 through the $2.6 billion acquisition of Progressive Enterprises, which operates Foodtown, Countdown and Woolworths.

It accounts for just over 40 per cent of New Zealand's supermarket trade.  Mr Luscombe said while first-half sales growth was largely driven by fresh food sales, growth in the third quarter was more across the board.

Looking ahead to the rest of the year, Mr Luscombe was expecting continued steady growth.  "From our viewpoint in the basic commodities, we think there'll be more of what we've seen in the third quarter. We don't see any major icebergs on the horizon."

He said further interest rate increases by the Reserve Bank were unlikely to have a negative impact.

"With our present business, because it's very much based on the basics of life, our experience to date has been that interest rates have more effect on discretionary spending."

Woolworths has just started to upgrade its New Zealand stores, and executives have just signed off about eight to 10 stores for major refurbishments. That number would steadily grow, Mr Luscombe said.

"Each month we'll have more stores where the necessary plans have been completed and the necessary applications for development changes have been put in place."

Woolworths is still waiting to hear if the Commerce Commission will clear its application for permission to bid for The Warehouse.

A decision is expected on April 27, but the commission has already extended its deadline twice.  Mr Luscombe said there had been no indication that there would be further delays, but he understood the commission's need to be thorough.

"It's a very important transaction for New Zealand and it's important that they (the commission) have the appropriate time to give it due consideration.  If they ask for a little bit of extra time then we'd certainly respect that need," Mr Luscombe said yesterday.

Woolworths is also looking to expand its general merchandise footprint in Australia.  Mr Luscombe confirmed yesterday that Woolworths had lodged an expression of interest for the general merchandise assets of Coles Group.

Australian retail giant Coles could become the centre of a bidding war after a consortium led by Perth-based Wesfarmers executed a surprise raid and snapped up 11.3 per cent of the retailer.  The consortium is also believed to include Macquarie and the private equity firms Pacific Equity Partners and Permira.

Much of the stake Wesfarmers secured came from major Coles shareholder Premier Investments. Premier, controlled by former Coles chairman Solomon Lew and chaired by Sir Ron Brierley, confirmed it had agreed to sell its 5.9 per cent stake in Coles for A$16.47 a share.

The price was a 2.2 per cent premium on Coles' Monday closing price, pushing the company's value up to just under A$20 billion (NZ$22.67 billion).

The Australian Securities Exchange placed Coles and Wesfarmers in trading halts on Monday, while they met for talks.

Wesfarmers said it would make an announcement to the market after those discussions.  Wesfarmers is one of Australia's biggest public companies. Its interests range from coalmining and insurance, to the home improvement chain Bunnings.

As well as its Australian supermarkets, Coles owns the stationery and office supply chain Officeworks, and the discount retail chains Target and Kmart.

Wesfarmers has reportedly fancied Coles' supply chain Officeworks, but may also be considering a full takeover, enabling it to merge Bunnings with Coles' supermarkets.

Potential buyers have been circling the troubled supermarket chain since late last year.  In October, Coles rejected as too low an A$15.25-a-share offer from a consortium led by Kohlberg Kravis Roberts & Co.  But Coles then put itself on the market in February after downgrading its profit forecast.  KKR returned as part of a consortium understood to include CVC Asia Pacific, Texas Pacific Group, the Carlyle Group and Blackstone Group.  Other interested parties reported to be running the ruler over Coles are the British retailer Tesco, the French retailing group Carrefour and the American chain Wal-Mart.

Even if Wesfarmers decided not to proceed with a full takeover bid, its 11.3 per cent holding would prove a stumbling block for other bidders.

"They have got a seat on the table and no one can have 100 per cent control of Coles without Wesfarmers agreeing to it now," said Steve Robinson, a portfolio manager with Alleron Investment Management, which owns Coles shares.