Merrill Lynch analysts say Woolworths will be at risk of an earnings downgrade once it reaches the point where it can’t rely on price cuts from food suppliers.
According to The Australian Merril Lynch analyst David Errington said Woolworths was attempting to offset rising costs by demanding lower prices from food manufacturers.
“The risk to food retailers’ gross margins, in particular Woolworths’, is when suppliers can no longer provide improved trading terms — that is, when the well is dry in terms of being able to provide the retailers with increased rebates,” he said.
“Our view is that this time is fast approaching, given the parlous financial condition many suppliers are currently in.”
But Woolworths has rejected suggestions it’s relying on price cuts to prop up earnings, and told The Australian earnings growth was “not primarily being driven by a reliance on support from suppliers”.
“Improvements in gross profit have come from a range of different factors and initiatives within the business — this includes effectiveness in promotional activity, improved stock management, reduced shrinkage, benefits of direct global sourcing and successful new store formats– in fact, the largest contributor of these in 2011-12 was shrinkage,” the company said.
Woolworths reported a gross profit margin of 26.26 per cent for the past financial year, up from 26.03 per cent last year.
Its earnings before interest and tax were also up three per cent to $3.35 billion, excluding the Dick Smith Electronics business, which has been sold.
Over the past five years the gross profit margin for suppliers has shrunk by six per cent, according to The Australian.
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