Woolworths, Taking Sales From Coles, Raises Forecast

Woolworths Ltd., Australia's largest retailer, raised its profit forecast after winning sales from Coles Group Ltd., a takeover target for buyout firms.

Net income will rise as much as 24 percent in the year ending June 30, up from a previous forecast increase of as much as 21 percent, Woolworths said in a statement. The Sydney-based retailer today said first-half earnings rose 28 percent to A$695.6 million ($552 million) as it boosted profit margins and accelerated sales growth at its supermarkets.

Chief Executive Officer Michael Luscombe, with grocery profit margins 20 percent higher than Coles, is automating ordering systems to cut inventory handling costs. That's pushing Woolworths further ahead of second-ranked rival Coles, which last week cut its forecast by 10 percent and put itself up for sale.

``Woolworths is in a class of its own and its increasing its market share as Coles is effectively a lame duck retailer,'' said Atul Lele, who helps manage the equivalent of $360 million at White Funds Management, in Sydney. ``Their supermarkets performed well on the sales line but also got margin expansion, which is a tough thing for retailers to do.''

Luscombe's profit forecast implies a 2007 net income of A$1.25 billion, compared with last year's A$1.01 billion. His previous forecast was for an increase of between 16 percent and 21 percent. Coles is forecasting annual profit little changed from last year's A$787 million.

Shares of Woolworths rose 56 cents, or 2.2 percent, to a record A$26.76 at 12:03 p.m. in Sydney. The stock has gained 12 percent this year.

Above Forecasts

Net income for Woolworths, which also owns Big W discount stores, hotels and consumer electronics shops, rose to A$695.6 million, or 58 cents a share, in the six months ended Dec. 31 from A$543.1 million, or 50 cents, a year earlier, according to today's statement.

First-half profit was expected to rise to A$688 million, according to the median estimate of six analysts Bloomberg News surveyed by telephone and e-mail.

``It looks as though that new guidance isn't itself a stretch given what they did in the first half,'' White Funds' Lele said.

Coles' Woes

Woolworths is grabbing market share from Melbourne-based Coles, which put itself up for sale last week after a plan to increase sales by rebranding stores backfired.

A Kohlberg, Kravis Roberts & Co.-led buyout group, which submitted a A$18.2 billion bid for Coles last year, has had discussions with Coles' advisers since November, and a second group comprising Cerberus Capital Management Ltd., Permira Holdings Ltd. and CCMP Capital Asia may also make an offer, three people with knowledge of the matter said Feb. 23.

Earnings before interest and tax from Australian supermarkets, where Woolworths gets two-thirds of sales, rose 31 percent to A$878.8 million. Its food and liquor profit margin, which measures earnings as a proportion of sales, rose 0.86 percentage points from a year earlier to 5.2 percent. At Coles, the margin is 4 percent.

Woolworths has about 45 percent of Australia's packaged grocery market, compared with 37 percent at Coles, according to analysts at Merrill Lynch & Co.

New Zealand

Supermarket profits across the Tasman Sea are also expanding, with Woolworths' New Zealand supermarket unit more than doubling earnings to A$69.3 million.

Woolworths is making New Zealand suppliers offer similar prices for goods as it pays in Australia as it builds on a 45 percent share of the grocery market to win customers from rival Foodstuffs NZ Ltd.

Roger Corbett, Luscombe's predecessor, spent A$4 billion on acquisitions since 2004, including the New Zealand operations of Foodland Associated Ltd., that country's second-largest grocer.

Luscombe is considering his own acquisitions and sought regulatory approval on Jan. 17 to buy Warehouse Group Ltd., New Zealand's biggest general merchandise retailer.

Back in Australia, earnings from Big W discount stores rose 3 percent in the half to A$107.6 million on demand for toys and clothing.

Woolworths' hotels unit, Australia's biggest owner of pubs, increased profit 35 percent to A$109.5 million.

The consumer electronics unit, which includes the Dick Smith and Powerhouse brands, increased earnings 4.6 percent to A$38.6 million.

The Australian Woolworths isn't related to London-based Woolworths Group Plc, which was founded in 1909 as part of its U.S. parent's expansion, or Woolworths Holdings Ltd. based in Cape Town, South Africa.

source:www.bloomberg.com