Go­ing long on Wool­worths and short on Mr Price

Financial Mail - Investors Monthly - - Opening Bell - Stafford Thomas

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.

Wool­worths CE Ian Moir Pic­ture: FI­NAN­CIAL MAIL

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