TRADE of the MONTH
Going long on Woolworths and short on Mr Price
Both Woolworths and Mr Price are great retailers. But we believe Woolworths, under the leadership of CE Ian Moir since late 2010, is gaining a significant strategic edge over Mr Price in the key areas of diversification, scale and business execution. Not least of the advantages Woolworths has over Mr Price is geographic diversification beyond Africa. This began with the acquisition of Australian fashion retailer Country Road in 1998.
It was not a start showered with instant success; Country Road was on the verge of bankruptcy. But it provided Moir, appointed Country Road CE in 2000, with the platform to prove his expertise as a retail strategist.
Then Moir proved it once more, as Woolworths CE, putting it on a growth path, and EPS jumped 125% in the first four years of his tenure. Subsequently, in 2014, he again turned his attention offshore in a move that stunned the market.
Beleaguered Australian department store retailer David Jones (DJ) came on board in June that year for a cool A$2.1bn. This was then almost 40% of Woolworths’ market cap. At the time DJ’s EPS had slumped 39% in just four years and its sales growth had stalled.
Confounding sceptics, DJ is fast being turned around. Sales began to lift in the first four months in the Woolworths fold by 2% and then jumped to a 6% rise in the full year to June 2015.
DJ’s sales gained further momentum in the latest six months to December, rising 11.2% to $1.15bn in an Australian department store sector where sales grew 4.1%. In rand terms sales were up 26.6% at R7.55bn.
Country Road is also powering ahead. Sales in the latest six months were up 11.9% to $516m in an apparel sector where sales rose 6%. In rand, sales were up 14% at R5.1bn.
Overall in the latest six months Australia accounted for 44% of group sales and 43% of operating profit.
It also gives Woolworths the scale that Moir sought to compete against global apparel giants such as H&M and Inditex.
Woolworths’ annual apparel sales, now at around R40bn, are 2.75 times Mr Price’s.
Mr Price’s failure to diversify through a sizeable acquisition offshore could prove to be its biggest strategic blunder.
Though an effort is being made to broaden its geographic horizon through the recent opening of two pilot stores in Melbourne, Australia, Mr Price remains largely dependent on an increasingly constrained SA market for about 92% of sales.
There were signs in Mr Price’s three-months trading update to December 26 that its business model was encountering headwinds. The group recorded sales growth of only 9.2% in its core SA Mr Price chain. Stripping out 7.9% product inflation, volume rose a mere 1.3% and fell 3.4% on a same-store basis.
Across the entire Mr Price chain the picture was bleaker due largely to severe import restrictions in Nigeria, and, hit by a collapse of sales there, the chain eked out 6.5% sales growth.
Woolworths’ apparel operations showed Mr Price a clean pair of heels, lifting sales in SA and 11 African countries 11.7% in the six months to December 27. Same-store sales growth was 8% while, adjusted for product inflation, volume lifted 5.1%.
In Woolworths’ food division, sales in the latest six months were up a sector-best 12.1% at R12.1bn and pre-tax profit rose by an impressive 17.6% to R865m.
Mr Price’s management attributes the poor showing in SA in the three months to December to errors that are part and parcel of fashion retail. They included bad fashion calls, product launch mistiming and stock-outs in some basic product lines.
A number of analysts believe problems are more deep-seated than that. One big concern is that the Mr Price chain has, in a bid to capture a bigger share of the mass middle market, lost appeal in its traditional upper-income target market.
Another concern is that foreign retailers are starting to take a toll. Among them are Australian retailer Cotton On, which now has 120 stores in SA, and new arrival H&M, which is pitching its lower-price range to compete head-on with Mr Price.
It casts doubt on Mr Price’s ability to deliver anywhere near the growth it has had for almost three decades. By contrast Woolworths is delivering solidly, EPS in the latest six months surging 30.6%. With DJ starting to kick in there appears sound reason to foresee that more of the same is ahead.