It’s
only a small point to many people, but amid all the record earnings hype and
higher dividends at Woolworths, the reduction in the ‘stock turn’ highlights
just how efficient and how powerful the country’s most profitable retailer is
becoming.

It’s
also a sign that perhaps Woolies hasn’t been as quick to pass on all its lower
costs to its consumers as it says it would. It
seems that Woolies’ cost of doing business is falling faster than its gross
margins are from deliberate price cuts, meaning more money is dropping to the
profit line to shareholders and not to consumers.

Woolies
today reported a 14.9% rise in after tax earnings to $709.5 million, on the back
of a 12.3% rise in continuing sales to $31.35 billion. Earnings before interest
and tax jumped 20.5% to more than 41.28 billion. The Dividend for the year is up
to 51c. All in
all impressive results, especially when compared to the still unachieved but
‘aspirational’ targets at rival Coles
Myer.

In
contrast to Coles, which is talking closure and/or sale of Megamart and its Myer chain of department stores, Woolies is
talking about building and growing new products, new stores and driving harder
into liquor, while it is looking at a staged expansion into electronic retailing
in India (Dick Smith). But it
was another improvement in ‘inventory days’ that tells you how Woolies is so far
ahead of Coles.

The reduction in inventory days this past year was by 1.9 days to 30.2
days. That
means from the time a product enters the Woolies supply chain to when it is sold
from the shelf takes 30.2 days, or a month.

That
means Woolies turns over its inventory or stock of products 12 times a year,
which is pretty good. It means lower capital costs (from lower working capital)
and higher profits. Woolies has been revamping its
logistics chain to drive down costs from its warehouses to the stores over the
past six years.

The
cost savings have been in the billions of dollars and Woolies says that it
shares them with customers, but in 2005 the savings were so great that more
ended up on the Woolies balance sheet than were passed on to customers in lower
prices, or so it seems. And
that’s the key: the figures issued by the retailer show that in its powerhouse
supermarkets business, the heart of the company Woolies so-called ebit margin (or the profit margin before interest and tax,
expressed as a percentage of sales) rose to 4.59%, or 4.59c in each dollar of
sales.

That was a rise of 0.31% of a cent (almost a third of a cent) over the
year, thanks to the better inventory turns. Doesn’t sound much, but
that’s 0.31% of $23.14 billion in sales in food and liquor: that’s an
extra $85 million dollars in earnings before interest and tax which
were more than $1.12 billion in 2005 alone.

And how
does Woolies do it? Well, its gross profit margin fell from 24.11c in each dollar of
sales in 2004 to 23.32c in 2005. But its
cost of doing business is falling faster: down to 19.17c in each dollar of
sales, compared to 20.14c in 2004. That produced an ebit to margin of 4.15c (but that includes the petrol
business).

Excluding petrol, the margin on food and liquor was
higher at 4.59c in all those billions of dollars of sales. Obviously there’s a lot more room for lower ‘Everyday’
prices to shoppers at Woolies supermarkets than they are currently being
offered.