Woolworths pins hopes on ANC elective conference
The ANC December elective conference would be a definitive event for Woolworths, group CEO Ian Moir told analysts at Thursday’s results presentation.
The South African environment was tough, with political uncertainty pushing the economy into a technical recession, he said. “There are some green shoots, but they are few and far between. Until we get to midDecember, we are in a hiatus,” said Moir as he released the group’s worst results in almost a decade on tough trading conditions in SA and Australia.
The share price dropped to a low of R63 in early trade on Thursday, before recovering slightly to close 3.3% lower at just less than R64.
Moir’s opening comments provided a forewarning of what was to come. The group was “right in themiddle of a massive amount of change”, he said.
Customer behaviour had changed, technology was advancing at a rapid pace and retail competition was globalising. “You must either change along with these changes or you will whither and die. We are not going to whither and die.”
The trading environment was tough across SA and Australia, which is the source of almost a third of group turnover and 50% of trading profit.
Economic growth in SA has been hit by political uncertainty, credit-rating downgrades, increased unemployment and low growth in disposable income. In Australia, growth was expected to continue at a rate lower than the long-term average, with consumer confidence remaining subdued.
“Together with low wage growth, underemployment and increasing energy costs, disposable income and consumer confidence will remain under pressure in Australia,” Moir said.
Group sales for the 12 months to the end of June were up 3%, but adjusted pretax profit was down 8.5% and headline earnings per share dropped 7.6%. Dividends were maintained at 313c a share.
Return on equity slumped to 20.8%, from 25.6% in what finance director Reeza Isaacs described as an even tougher year than was expected. The medium-term operating margins have been adjusted downwards in line with the outlook for continued tough trading conditions ahead.
Moir described the 8.6% sales increase reported by Woolworths Food as “spectacular, given the market we’re in”. Comparable sales were up just 4.6%. Clothing and general merchandise reported a 0.9% drop in comparable sales.
In Australia, disappointing private-label sales hit David Jones’s performance and led to comparable turnover declining 0.7%. As a result, the design and production of David Jones private label has been transferred from SA to Australia.
Asief Mohamed of Aeon Investment Management said management had prepared the market for the poor results, which was why the share price was down only 3%.
Management had identified some of the mistakes it had made and although more subdued about the Australian business, it seemed on the right track. “This might be a base from which to grow earnings, but it will probably take three to five years to get all the businesses operating efficiently.”
Until that happened, it was likely investors would judge the 2014 acquisition of David Jones as poorly timed.
“It’s easy to say that now with the benefit of hindsight, but given what’s happened in the years since the purchase, it does look as though they overpaid.” It was important to remember that in the run-up to the 2014 deal, there had been a near obsession with South African companies diversifying offshore, he said.