Woolworths shares hammered after disappointing interim results

Woolworths shares fell the most since November 2021 after the retailer reported that none of its divisions had increased sales volumes in the half-year to December 24 and its clothing business continued to underperform, though its food business produced a “resilient” result.

Its best-performing food division saw like-for-like sales growth of 7.2%, slightly higher than Shoprite’s growth of 6.3% for a similar period.

“Our biggest business remains our strongest business,” CFO Zaid Manjra said of the group’s food sales, adding that the performance was “industry leading”.

Sales growth was, however, still lower than in-store food price growth of 9.1%, indicating the company is selling slightly lower volumes than before — a phenomenon all listed food retailers have noted in recent results. Overall food sales, including stores at petrol stations, grew 8.4%.

The market took a dim view of the results, with its shares falling as much as 7.34% before ending the session 5.34% lower at R63.42.

IG analyst Shaun Murison said the food business was resilient. “The business has managed to grow sales and maintain a gross profit margin of 24.6%, despite challenges such as load-shedding and avian flu,” he said.

Consumers are beginning to view Woolworths’ food prices more positively, according to the “price perception” data it generIn ates, CEO Roy Bagattini said. Woolworths has spent R750m on reducing prices over three years.

The group is focusing on offering value for money; consumers may pay more for a banana, but feel it was worth the extra cost if the produce stayed fresh for longer, he said.

“Over the last couple of years we’ve been investing in a number of key categories to bring prices to a point where they are more acceptable,” Bagattini said. “They won’t be cheaper, but more accessible.”

The retailer reported a 14.2% drop in pretax profit to R2.5bn, while adjusted headline earnings from continuing operations fell 5.6% to 209.7c. An interim dividend of 148c per share, down 6.6% year on year, was declared.

However, its local clothing and homeware business still isn’t performing as well as expected.

Since 2021, Woolworths has been striving to improve its fashion division by focusing on key lines such as denim and children’s wear, reducing its extensive range of formal workwear, and selling fewer items on promotion.

Bagattini conceded in 2020 the clothes were viewed as “expensive and boring”.

Its SA fashion division maintained gross margins of 48% in line with the strategy to sell more items at full price. However, volumes fell by almost 10%, with sales up 2.2%.

Sasfin analyst Alec Abraham said he was a “little disappointed in the SA clothing result, because of the eight percentage point lag to the sector growth”. The clothing sector grew 10.1% from June to December, according to Stats SA, he said.

Sales continued to fall into 2024, its post-period data shows.

Bagattini said one issue that Woolworths was focusing on is poor availability in stores, with either too few of the popular sizes or certain items selling out, he said. This was in part because of legacy IT systems and a strategy of delivering all stock to stores upfront, with no reserve stock to send to outlets that sell out a certain product.

It is also trialling daily deliveries to clothing stores in KwaZulu-Natal using food trucks so as to have fewer missed sales.

In Australia, the Country Road clothing business reported a drop of about 46% in profit after it sold 5% fewer goods but had high fixed costs.

Consumer confidence Down Under was at its lowest since the 1970s, Manjra said.

Bagattini defended Country Road’s contribution to the business, saying it had added about R600m in profit to the group, was self-funding and provided higher-end apparel for the upper-end clothing business in SA.

Woolworths is investing R10bn over three years to grow and this is one reason debt increased from R671m to R4.1bn year on year.

Bagattini was comfortable with the amount, saying investing in the business produced excellent returns. “We have one of the healthiest balance sheets in the sector, by a long way.”