Wool­worths – carv­ing a re­silient niche

Finweek English Edition - - INVESTMENT - Shaun Muri­son @ShaunMurison_ IG is a mar­ket an­a­lyst at IG South Africa.

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.

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