SYDNEY — Australian retailers are starting to see the first signs of improvement in consumer spending after enduring the worst retail trading conditions in decades.

Australian retailers are starting to see the first signs of improvement in consumer spending after enduring the worst retail trading conditions in decades.

Grant O’Brien, chief executive officer of Australia’s largest retailer, Woolworths Ltd., says the local economy is improving but it is premature to declare the worst is over for the retail sector.

"The longer the globe is able to exist without something catastrophic occurring, the more likely it is that consumer confidence will return," O’Brien said in October after releasing better-than-expected sales figures for the three months ended in September.

Woolworths’ food and liquor stores posted their best quarterly sales since the June 2011 quarter, with same-store sales rising 2.3% and total sales by 4.6% to $10.1 billion (Australian).

The BIG W discount department store chain delivered its strongest sales growth for three years, with same-store sales jumping 3.4% and total sales up 6.2% to $1.1 billion.

Woolworths’ same-store sales growth in food and liquor remains below that of Coles Group, which has outperformed Woolworths for 13 consecutive quarters (Coles’ same-store food and liquor sales rose 3.7% in the September quarter). However, the sales growth gap narrowed in the September quarter in what brokers believe may be the first sign that Woolworths is regaining ­momentum.

O’Brien has attributed the improving trend not to external market conditions but initiatives implemented after he took the helm in October 2011. He says Woolworths is making headway with four strategic priorities unveiled almost 11 months ago in the retailer’s first strategy presentation to investors in eight years.

O’Brien is aiming to restore profit growth to an “aspirational” 10% by extending and defending Woolworths’ leadership in food and liquor, acting on its portfolio to maximize shareholder value, maintaining its track record of building new growth businesses and putting in place enablers for a new era of growth.

The retailer has launched new marketing campaigns highlighting its fresh food credentials, opened a record number of new stores, extended its market share in liquor, negotiated improved trading terms with suppliers and launched new promotions that emphasize value for families.

Easing deflation in fruit and vegetables, where prices have fallen by more than 20% over the past year, contributed to sales growth, but shopper visits rose 4.6% and units per basket 3% as more consumers shopped on ­promotion.

Outside food, liquor and general merchandise, O’Brien is building a new growth business in the $42 billion home improvement market. The first 20 of some 150 Masters big-box stores — a joint venture between Woolworths and Lowe’s Cos. — have opened in the past year, and sites have been identified for another 100 stores.

At the same time, Woolworths has stepped up cost-savings efforts under Project Quantum, is laying the groundwork for a new era of supply chain productivity and has emerged as Australia’s largest multichannel retailer after online sales nearly doubled in 2012.

O’Brien is also restructuring the group’s retail portfolio. He has sold the underperforming Dick Smith consumer electronics business for $20 million, after writing down the book value of the assets by $400 million, and offloaded the Croma consumer electronics venture in India to Woolworths’ partner, the Tata Group for $35 million.

O’Brien has also announced plans to spin off $1.3 billion worth of shopping centers through an in-specie distribution to shareholders. Woolworths was forced to step up shopping center development during the global financial crisis, when major developers struggled to find funding. As a result, the value of property on Woolworths’ balance sheet has risen from around $1 billion to $4 billion over the past few years, dragging down group returns.

The property spin-off is expected to dilute earnings per share by about 1% in 2014, but UBS expects the transaction to reduce debt and increase return on invested capital by around 225 basis points to 28%.

While shareholders were disappointed at the price Woolworths achieved for Dick Smith, many have welcomed the property spin-off.

"The market seems quite pleased with the progress against some of those strategic initiatives, and Grant O’Brien seems to have taken the helm in a confident way with some definite objectives set in place to take the company to new levels," said Arnhem Investment Management portfolio manager Martin Duncan.

But restoring sales and profit growth to historic levels will require a combination of internal gains, easing deflation and a sustained improvement in consumer spending. Brokers expect underlying earnings per share to rise between 5% and 8% this financial year, compared with normalized growth of 3.3% in 2012.

Sue Mitchell covers the retail and food and beverage industries for the Australian Financial Review and is based in Sydney.