SYDNEY: Woolworths Group Ltd reported a slump in first half profit on Wednesday as COVID-19 lockdowns and mandatory staff isolation blew out costs, but the No. 1 Australian grocer's shares rose as investors focused on robust sales growth.

The country's biggest employer said net profit from continuing operations and excluding one-off costs fell 6.5% to A$795 million ($575 million) in the six months to Jan. 2. Profit from its supermarket chain, a closely watched measure, dipped 7.6%.

The results had been larged flagged by Woolworths in December when it warned the half year would be one of its toughest as lengthy lockdowns to slow the Delta outbreak gave way to significant numbers of staff in isolation because of the fast-spreading Omicron variant.

Investors instead looked to headline sales, up 7.1% for food, as a sign the company could benefit from rising inflation and grow profit as pandemic-related disruptions dissipated. Woolworths shares rose more than 4% on Wednesday, against a flat overall market.

"Given a comprehensive update was provided in December, there were no surprises in the numbers but ... sales growth is strong," Jefferies analysts wrote in a note.

Analysts at Barrenjoey said Woolworths broadly met its guidance despite bigger than expected COVID-19-related costs, "suggesting the underlying business is in better shape".

By comparison, smaller rival Coles Group Ltd COL.AX , which along with Woolworths rings up about two-thirds of Australian supermarket sales, posted a narrower 2% dip in first half profit a day earlier. But its supermarket sales only grew 2%. 

Neither grocer gave a fixed profit forecast but both singled out inflation as a force behind higher shelf prices and operating costs. Woolworths said sales in the first seven weeks of calendar 2022 were up about 5%.

"There is pressure there, the pressure is legitimate," Woolworths CEO Brad Banducci said on a call with journalists, when asked about inflation.

"It's not only on the products we sell but across everything that we do. There's a long way to go on this issue."

Inflation appeared more pronounced in non-food retail, Banducci added. Though supermarkets generate about 90% of Woolworths profits, it also runs discount department store chain Big W.

Woolworths trimmed its interim dividend to 39 Australian cents per share, from 40 cents the prior first half, excluding the dividend contribution from its liquor store and pubs unit which was spun off last June. 

($1 = 1.3835 Australian dollars)

(Reporting by Harish Sridharan and Indranil Sarkar in Bengaluru; Editing by Shinjini Ganguli and Jane Wardell) ((