Shares in Woolworths fell by 8% yesterday after it warned that a contract to supply Tesco with its CD and DVD stock may not be renewed when it comes up for renewal next year.
The news overshadowed another announcement regarding the retailer's pre-Christmas trading, which was better than expected, meaning end of year profits should be at the higher end of past estimates. Commenting on sales in the festive period the company, a bigger force in music retail than lots of people realise, told investors: "Despite a competitive environment, Christmas trading across the group proved satisfactory. Our approach going into the key Christmas trading period was to maximise full-price sales, to drive margin and to manage our product mix carefully."
However, Woolworths boss Trevor Bish-Jones also had to announce that his group's Entertainment UK division, which supplies many supermarkets with their music stock, is unlikely to keep its profitable client Tesco when their current contract comes to an end. Bish-Jones: "We'll continue to supply them until February 2007, but we haven't yet agreed to supply them post that date. At the moment our view is that we probably won't continue to trade with Tesco after that."
The potential loss of the Tesco contract follows news that recent changes in accounting rules will hit Woolworths hard because they cause increased leasing charges. As a result of the rule change the retailer expects end of year profits to fall some £17 million from the originally expected figure of £50-60 million.