Woolworths – carving a resilient niche
The year so far has been tough for local retail counters. After signif icant outperformance i n 2012, 2013 has witnessed a sector under pressure as a challenging economic environment has dampened company earnings of major players. This has resulted in significant discounting of respective share prices, dragging down sector counterparts in the process. The risk of impairments from the lower to middle LSM groups has grown, while unsecured lending has slowed and consumers f ind themselves under an elevated level of financial constrain.
African Bank was one of the first and hardest hit as its unsecured loan book and retail exposure, in the form of Ellerines, witnessed write-downs and posted an uneasy outlook for the future. Shoprite Holdings and Truworths added to the sector’s woes as earnings fell short of consensus and disappointed investors who had priced these counters for stronger growth.
Despite catering to a higher LSM grouping, Woolworths has not been immune to the unreliable selling within the retail sector, however, it has managed to outperform its counterparts in a number of areas. Although a company like Woolworths has fallen victim to sector correlation, the results tell a different story. Headline earnings per share growth of 27.3% for the year ending June 2013 confirm the consistent growth the company is and has been achieving. Headline earnings have added in excess of 24% compounded over the last four years, while the annual dividend offering has grown from 85c per share in 2009, to 234c per share in 2013. The yield in terms of dividend now nears an annualised return just short of 4% in a company that is priced for growth, which its earnings show it is currently exceeding.
Clothing and merchandise revenue has increased by 12%, which has contributed around 31% to the group’s revenue and more than 50% of pre-tax profit with gross profit margins improving to 46.4% and sales adding another 12.3% contribution over the previous comparative period. The food portion of the business boasts a 50% contribution to the groups revenue, which improved by 15.3% over the 52-week period. The food revenue growth is more than double that of the market average, which is little over 7% at present.
The Australasian component made up of Country Road and the Witchery Group witnessed growth that nearly doubled in rand terms, with gross margins now around 62%. Encouragingly, the f inancial services aspect has witnessed a stable impairment rate, unchanged below 2%.
Essentially, there appears to be little wrong with the company as it gains in most aspects of its business. The net income is a healthy percentage of shareholder equity and the group now has 1 103 stores in total, planning expansion into Africa by adding a further 82 stores over the next three years.
From an investment perspective, the share price rebounded sharply post its results release and this highlighted the favourable reception and positive sentiment present in the company. A 20% annual capital gain would seem conservative when we consider that the last four years have achieved an average return in excess of 50%, excluding dividends. Weakness due to industry sentiment or general market volatility could provide the opportunity for longer-term investors to gain or increase their exposure to the stock. Woolworths has succeeded by carving out a niche for itself, catering to higher income groups in the retail domain. The model is proving resilient through a testing economic climate and should only improve as economic conditions recover and advance.