Australia's largest retailer Woolworths has posted a 21% increase in first quarter profits, pointing to an improvement in discretionary spending on the back of lower petrol prices.

Woolworths said that sales from continuing operations increased by 20.9% to A10.74bn (US$8.13bn) in the first quarter, driven by a strong performance in the supermarket division.

Chief executive Michael Luscombe, who took over from Roger Corbett this month, said the increase reflected an extension of FY2005/6's strong performance and the ongoing impact of recent acquisitions.

"It has certainly set a solid sales base for the rest of the year," Luscombe said. "Particularly pleasing is the continued strength in our comparable sales in Australian food and liquor."

Australian food and liquor sales were aided by price cuts, which increased volumes, and store openings, Woolworths said in a filing today (23 October). Australian food and liquor sales increased by 9% in the quarter ended 1 October, with comparable store sales up by 4.9%.

In New Zealand, where the Australian retail giant recently acquired the assets of Foodland, supermarket sales remained flat, held-back by an industrial dispute that has now been solved. 

Dropping petrol prices, which were down by about 20 cents per litre since mid-August, resulted in improved discretionary spending. "At this stage, we believe that fuel prices probably will remain at their present levels through until at least Christmas," Luscombe said in an audiocast of the first quarter sales results.

Comparable sales from general merchandise chain Big W were flat but strengthened as the quarter progressed, its overall sales rising 6.2%.

Woolworths reaffirmed its annual sales and profit guidance, stating that it expected sales to increase by 8-12% and profit to increase by 16-12%. "Given the continuance of current retail trading patterns and the present business, competitive and economic climate continuing, Woolworths expects sales from continuing operations for the full year to grow in the region of 8-12%," Luscombe said.