Woolworths cut its year-end dividend by two-thirds yesterday despite the return to profitability of its retail business and strong performance from the wholesale entertainment division.
The group's 2007 results showed revenue up 8.5 per cent to £2.97bn and adjusted profits up 30 per cent to £28.3m. But net debt was also significantly increased, from £113m to £246m, and the final dividend was set at 0.17p, making a full-year payout of 0.6p compared with 1.77p last year.
Analysts were expecting some reduction in yield, but the announcement came in at the lower end of the scale and the share price dropped 6.38 per cent to 11p.
Trevor Bish-Jones, the Woolworths chief executive, said: "We thought it appropriate to create a more sustainable balance between the return to shareholders and maintaining the investment needed to continue to develop the business."
The most notable success was profits of £3.4m from the group's high street chain, compared with £12.8m of losses last year. The division was pushed back into the black by a 101 basis point rise in gross margins, stringent cost controls and exploitation of its property portfolio. A 3.2 per cent drop in like-for-like sales was explained by a deliberate strategy of not chasing unprofitable sales such as low-margin electronics, and the impact of the collapse of the Farepak voucher scheme.
Targets for the coming year include a 40 basis point gross margin rise and cost-cutting worth a further £8m, alongside shop re-fittings and a major marketing campaign focusing on competitive pricing across 5,000 products.
"We are particularly pleased that Retail has returned to profit in a year in which our markets remained vol-atile and fiercely competitive," Mr Bish-Jones said. "Given the advances made last year and our plans to make further improvements, while continuing to cut costs, we are well placed to make continued progress."
The group's entertainment wholesale business, EUK, also had a good year. Sales shot up by 36.6 per cent, on the basis of new customers and new acquisitions, and the 2 entertain joint venture with BBC Worldwide saw sales up 23.5 per cent to £241m, with particularly strong performances from the Planet Earth DVD in the US and Top Gear-related products in the UK.
Mr Bish-Jones once again ruled out the possibility of splitting the group into two, an issue that has been raised periodically by shareholders as the retail business has slumped.
Without EUK, the high street stores are not in good shape. Some £11.4m of the much-vaunted return to profit was earned from the assignment of store leases, almost double the year before. And altered depreciation policies added £5.1m.
"If they got rid of EUK and 2 entertain, they would be left with an unprofitable retail business," Christian Koefoed-Nielsen, an analyst at Panmure Gordon, said. "There is a significant strand of opinion that would like the management to realise value, but if you take away the leasehold profits and changes to depreciation, you are looking at a loss."