(Adds Attorney General comment, updates shares)
By Byron Kaye and Renju Jose
SYDNEY, Feb 26 (Reuters) - Australia's largest supermarket chain Woolworths Group Ltd WOW.AX posted a jump in first half profit as promotional giveaways lured shoppers, but warned of softer trading ahead as drought and months of bushfires hurt the quality of its produce.
The country's biggest company by sales also on Wednesday bumped up its total projected bill to nearly A$400 million ($264 million) for staff backpayments dating back nearly a decade, adding to the challenges for the Sydney-listed operator of about 1,000 supermarkets.
Shares of Woolworths fell 3% by midafternoon, more than a broader market decline of 2.3% amid fears about the spread of the coronavirus, as investors looked past a rise in underlying profit and focused on its lacklustre outlook.
"We continue to navigate an uncertain consumer and natural environment and expect this to continue, with a slower start to trading in Q3," Chief Executive Officer Brad Banducci said in a statement.
Banducci added that a three-year drought, which continues even after recent heavy rain, was driving up food prices, while the country's worst bushfire season in a generation had "impacted fruit and vegetable quality in some instances".
The update gave no dollar or percentage figures on third-quarter trading, which runs from early January to end-March.
For the six months to Jan. 5, Woolworths said underlying first-half profit from continuing operations rose 15.7% to A$979 million ($646.24 million), although net profit fell 7.7% partly due to staff backpayments.
The company has started compensating underpaid staff after a review last year found it had short-changed salaried store managers by failing to count their full shift allowances under Australian industrial law. Wednesday, it said it was raising the total amount it expected to pay out to those workers to A$315 million from A$300 million, plus an extra A$80 million for costs associated with remediation. It also revised up the total number of affected employees to nearly 7,000 from 5,700.
Australian companies have experienced a spate of underpayment scandals, including at smaller Woolworths rival Coles Group Ltd COL.AX , which announced a A$20 million underpayment provision at its half-year earnings last week. disclosures have prompted the federal government to say it will criminalise worker underpayment including banning people from being company directors if they preside over what it calls "wage theft".
Attorney General Christian Porter told a local radio station the Woolworths update was "enormously disappointing" and the government was "weeks away" from introducing the law.
Woolworths declared an interim dividend of 46 Australian cents per share, up from 45 Australian cents a year earlier. The company booked a 6% rise in half-year sales from continuing operations, to A$32.41 billion. ($1 = 1.5161 Australian dollars)