Dividend cut in store at Woolworths

WOOLWORTHS is tipped to become the latest retailer to slash its dividend despite the high street chain's return to profit.

Analysts are signalling that chief executive Trevor Bish-Jones will be forced to disappoint investors with a dividend cut on Wednesday as concerns grow about how Woolworths can increase sales at its stores.

Bish-Jones said earlier this year the group's retail arm, which accrued a £12.9m loss in 2006, would post a small profit for last year. But analysts suggest the turnaround has been driven largely by property revenues as unprofitable stores have been downsized and sold.

Nick Bubb, retail analyst at Pali International, said property is likely to have contributed around £10m to the retail business this year. He expects overall profits at the retail arm to be no more than £2m-£3m.

"A profit is a profit I suppose but it is not seen as a very high quality profit. Given the debt and the leveraging that they've got, it would be pretty amazing if they didn't cut the dividend next week."

Christian Koefoed-Nielsen, retail analyst at Panmure Gordon, said a dividend cut is almost certain. The bigger question, he argued, is by how much Bish-Jones will be forced to cut the dividend.

"I don't think there'll be any surprises that they'll cut the dividend," he said. "The issue will be what they cut it to."

Investors will be hoping that Woolworths won't be forced to take the same drastic measures as B&Q owner Kingfisher, which last week slashed its dividend by half amid warnings that the challenging conditions on the high street are likely to worsen in the short-term.

But recent like-for-like sales figures for Woolworths don't raise much hope, analysts argue. In January Bish-Jones said like-for-like sales suffered a 3.2% decline in the 49 weeks to January 12 and, unusually, he refused to disclose Christmas trading numbers – the period when Woolworths stores traditionally make most money. His decision to withhold figures sparked speculation in the City that sales may have suffered a like-for-like decline of as much as 6% during the 11 weeks over Christmas.

However, Woolworth's successful wholesale trading arm EUK, which distributes DVDs, music and books to other retailers, is expected to lift overall group earnings for the year.

Consensus in the city points to a 19% rise in pre-tax annual profits to £26m, also driven by 2 Entertain, Woolworths' music and video distribution joint venture with the BBC.

Earlier this year Bish-Jones rejigged the management at EUK sparking renewed speculation of a break up of the 99-year-old Woolworths group. Lloyd Wigglesworth, who was managing director of EUK for more than three years, was replaced by Steve Lewis, formerly managing director for retail and distribution at Woolworths' high street operation.

But analysts now think a break up is unlikely as the retail operation looks increasingly unviable as a separate company.

Bubb said: "It'll be very difficult to disentangle that retail side from the wholesale side which is still very profitable. The retail side would have to be profitable in its own right to stand on its own two feet which I don't think is possible."

What may be more likely, he argued, is the sale of 2 Entertain. Woolworths owns a 40% stake in the venture and is likely to be able to procure a good price from an American media firm if it decides to sell.

Either way, Robert Clark, senior analyst at the Retail Knowledge Bank, said Bish-Jones will have to make some serious decisions over the retailer's future as at the moment its diverse stock, which ranges from kitchen products to pick and mix sweets, isn't striking a chord with shoppers. He said: "The competition has got better all round and Woolworths is the Jack of all trades in the middle. Sad as it may seem I'm not sure that it has got a future in British retailing any more."