By Harish Sridharan
(Reuters) -Retailer Woolworths Group posted a nearly flat annual profit on Thursday, and said supply chain snarls and team absenteeism have dented sales of its key Australian Food business at the start of the new fiscal year.
Lockdowns through the course of the year and mandatory staff isolations blew up expenses for Woolworths and its smaller rival Coles Group (OTC:CLEGF), while bad weather and floods have blocked roads and wiped out crops, increasing wholesale costs.
The cost of doing business, excluding one-off expenses, increased 96 basis points (bps) to 25.1% for Australian Food in the reported period.
"We expect the trading environment to remain volatile and challenging due to endemic COVID disruptions, ongoing supply chain challenges, higher costs across our business and cost-of-living pressures for our customers," the company said.
Shares of Australia's largest supermarket chain fell 4% to A$35.92, against a 0.5% gain on the broader market
Total sales at Australian Food segment for the first eight weeks of fiscal 2023 were down 0.5% from last year. Sales in its New Zealand Food segment were down 1% during the same period.
Woolworths, however, said COVID-related costs are expected to substantially decline in fiscal 2023 as customer behaviour continues to normalise.
"Similar to Coles, outlook commentary was subdued but unwinding COVID costs will be a tailwind into FY23," analysts at Jefferies said.
Australia's second-biggest grocer Coles posted an estimate-beating annual profit on Wednesday, as it reined in spending amid surging inflation, but warned of persistent cost pressure.
Retailers globally have warned that rising fuel and ingredient costs will translate into higher price tags as they seek to protect margins. Woolworths' gross margin for the year rose 35 bps to 29.7%.
Rising prices and the cost-of-living crisis have prompted consumers to cut discretionary spending in favour of essential goods such as groceries.
Some customers are trading down from beef into more affordable sources of protein and trade across from fresh vegetables into more affordable frozen and canned offerings, Woolworths said.
The company posted annual net profit after tax from continuing operations, excluding items, of A$1.51 billion ($1.04 billion), compared with A$1.50 billion a year ago.
($1 = 1.4478 Australian dollars)