Australian Food and Petrol

TRADING PERFORMANCE

Australian Food sales for the year were $34.8 billion, a decrease of 0.2% on the previous year. Comparable sales declined by 1.3% in FY16 primarily driven by significant price investment. Despite an increase in average price deflation ¹, comparable sales in Q4’16 showed the smallest decline for the year at (1.1)%. Sales per square metre declined by 3.7% compared to FY15 due to a reduction in comparable sales primarily due to price investment to restore our competitive position and an increase in overall trading space.

We returned to positive comparable transaction growth in Q2’16 with transaction growth of 2.6% in H2’16. Comparable items showed an improving trend over the second half turning positive in June. Stabilising the trend in items per basket remains a key focus area.

Customers are noticing the improvements we are making with our overall Voice of the Customer (VOC) satisfaction score improving significantly over the financial year to finish the year at record levels of 75%. The improvement was consistent with our store controllable VOC which also improved over the year with a score of 77% in June. Pleasingly, Team Attitude remains one of our highest scores with Time in Queue showing the biggest improvement following our investment in team hours and service focus. Availability and Fruit & Veg have seen some recent improvements but remain the biggest opportunities.

We continued to lower prices for our customers with a reduction in average prices ¹ of 2.3% for FY16 and a 2.7% reduction in prices in Q4’16. Excluding tobacco, average prices ¹ declined by 3.8% in the fourth quarter. In FY16, we invested over $500 million in lowering prices or not passing through cost price increases to our customers compared to FY15 despite the significant price investment that had already taken place in H2’15. We continue to reduce our reliance on promotions in favour of lower shelf prices with 1,580 products on our Price Dropped program by the end of the year.

Comparable sales for the eight weeks ended 21 August 2016 increased by 0.3%.

Our team is focused on improving sales productivity in our business and sales per square metre will be a key metric in our long-term incentive plan. Central to improving our sales productivity is our shift in focus away from expanding space to renewing our existing store fleet. We opened six renewal stores in June, and customers are responding to our improved store-experience with a 14% improvement in VOC and a 9% growth in transactions in these stores.

Petrol sales were $4.6 billion, a decrease of 18.1% on the previous year (volumes decreased by 9.1%). Sales were impacted by changes to the Woolworths – Caltex alliance ² in FY15 where sales from 131 Caltex operated sites were no longer recognised by Woolworths, and declining average fuel sell prices (unleaded FY16: 120.5 cpl; FY15: 134.4 cpl). We cycled the changes to the Woolworths – Caltex alliance ² in December.

Comparable petrol sales (dollars) decreased 11.8% for the year due to the impacts of declining global oil prices and a decline in comparable volumes of 2.4%.

Merchandise sales for the year increased 6.4% and comparable merchandise sales increased 3.7%.

Australian Food and Petrol (AUFP) gross margin decreased 82 bps due to price investment offset somewhat by lower Petrol sales which drove a change in sales mix to the higher margin in the Food business. The impact of price investment was even more pronounced in our Australian Food business where gross margin declined by 178 bps.

AUFP CODB as a percentage of sales increased 204 bps on the prior year driven by lower sales (including the impact of the changes to the Woolworths – Caltex alliance ²), investment in team hours and higher team performance-based bonuses compared to the prior year where no bonuses were paid. This was partly offset by cost savings generated through improved efficiency across store operations and support functions.

AUFP EBIT of $1,759.8 million decreased 40.8% on the previous year, with the EBIT margin decreasing 286 bps.

1. We have adopted a revised method for calculating inflation for our Australian Food and Liquor business and will only disclose an average price inflation measure going forward. In developing the revised measure we consulted with Deloitte Access Economics. The new measure uses the Fisher methodology to weight changes in average quarterly prices by the average of current quarter and preceding quarter volumes and reflects the effects of promotional activity and changes in volume. We believe this measure is the most appropriate representation of the average price changes of items that consumers have bought during the quarter. Note that due to the change in methodology, the data is not directly comparable to previously reported data. Below is restated data for FY15 using the new method.

   Average price changes	Q4’15	Q1’16	Q2’16	Q3’16	Q4’16
   Price change (% year on year)	(1.2%)	(1.8%)	(2.5%)	(2.4%)	(2.7%)

2. Petrol sales and volumes are not comparable with the prior period given changes to the Woolworths-Caltex alliance that became effective progressively during Q2’15. Given operational changes under the new arrangements with Caltex, Woolworths no longer recognises sales from the Caltex-operated sites in its financial results. The new arrangements do not have a material profit impact on the Woolworths Group. Further details on the revised arrangements with Caltex are provided in our ASX announcement dated 20 November 2014.

3. FY15 Funds Employed for Australian Food, Petrol and Endeavour Drinks Group (FPE) has been restated to reflect a change in the classification of accounts payable balances between the FPE and Unallocated segments. Prior to the current period, FPE accounts payable balances were transferred to the Unallocated segment balance sheet when they were processed for payment, and would remain in the Unallocated segment balance sheet until they were paid. During FY16, there was a change in process which has resulted in accounts payable balances remaining in the FPE balance sheet until they are paid, no longer resulting in a transfer of accounts payable balances from FPE’s balance sheet to the Unallocated segment balance sheet. Previously reported FY15 FPE Funds Employed of $4,756.4 million and Return on Average Funds Employed of 73.71% have been restated to be consistent with FY16. This change does not impact Woolworths Group’s closing Funds Employed and Return on Average Funds Employed reported results.

4. In FY16, total significant items of $4,013.7 million before tax ($2,627.8 million after tax attributable to shareholders of Woolworths) were recognised. In FY15, total significant items of $425.9 million before tax ($307.3 million after tax attributable to shareholders of Woolworths) were recognised. Where noted, profit and loss items have been adjusted to reflect these significant items.