Woolworths shares drop after shareholders warned to brace for an earnings hit

Shares in supermarket giant Woolworths (ASX:WOW) took a hit this morning after the company downgraded its earnings guidance.

While its stores have remained open throughout lockdowns, they were affected by supply chain and staff shortages in a quarter CEO Brad Banducci said was one of the most challenging halves in recent memories.

The company tipped earnings in its foods division of $1.19-$1.22 billion, down from $1.31 billion in the prior corresponding period.

“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,” Banducci said.

“This includes the significant disruptions we have seen across the end to end supply chain and the material inefficiency this causes in our stores, distribution centres and transportation.”

The unveiling of this earnings hit sent Woolworths shares down nearly 10% this morning.

Woolworths (ASX:WOW) share price chart

Lockdowns ended but bad weather hits

While Woolworths noted sales in NSW and Victoria improved in October, it wasn’t a case of going straight back to normal.

Woolworths’ sales in the December quarter so far did improve by 2% compared to last year.

But the company said inclement weather in NSW reduced outdoor entertaining occasions and tobacco sales had continued to decline.

Sales at Big W did improve compared to the last quarter but were still 3.3% lower than the same time last year and projected earnings there ($20-$30 million) were a fraction of that recorded last year ($133 million).

Nonetheless, Banducci was bullish about the Christmas shopping season.

“As we head into the key Christmas trading period we have a good in-stock position and positive trading momentum,” he said.

And post-Christmas the company tipped costs to reduce so long as there were no disruptions even with continued investment in its ecommerce capabilities.

“As customer behaviours begin to normalise and COVID-related supply volatility reduces, we expect an improvement in our underlying operating performance,” Banducci said.