Woolies pumping $516m into sales to catch rival

Chief executive Grant O'Brien says the profit forecast has been downgraded so it can invest more into reducing its food and grocery prices. Photo / Thinkstock

Woolworths will funnel more than A$500 million ($516 million) into improving sales as it lags further behind supermarket rival Coles.

The company's supermarkets division reported a disappointing 3.4 per cent increase in sales for the half year, markedly weaker than Coles' sales growth of 5.3 per cent.

Woolworths has downgraded its full year profit guidance and its director of supermarkets and petrol, Tjeerd Jegen, has resigned.

Chief executive Grant O'Brien says the profit forecast has been downgraded so it can invest more into reducing its food and grocery prices. He says short-term profitability is being sacrificed for sustainable long-term growth and about A$500 million in cost savings will partly fund supermarket investment.

"All our efforts will be on restoring sales momentum and continuing to deliver profit growth," he said. "In the short term, our focus is on investment in cheaper prices and better service to customers."

Woolworths revised its full-year net profit growth to a range of 1.8 per cent to 6.6 per cent, compared to its original target of 4 to 7 per cent.

The company suffered a 3.1 per cent slide in its first half profit to A$1.28 billion because of costs associated with its efforts to turn around Big W. But its underlying net profit of A$1.38 billion did beat market expectations.

Big W's comparable store sales dropped 5.4 per cent and its earnings before interest and tax (ebit) fell 9 per cent on declining consumer confidence and ongoing transformation costs, Woolworths said. However, Big W is still expected to return to profit in the 2016 financial year. Shares in Woolworths fell nearly 9 per cent on Friday, or A$3.03, to A$30.92.

Profit growth slides

• Half year profit of A$1.28b, down 3.1 per cent from A$1.33b profit in 2013/14

• Revenue of A$32.54b, up 1.8 per cent from A$31.94b

• Fully franked interim dividend of 67 cents, up from 65 cents

- AAP