Woolies is ‘fixing’ David Jones
Investments to take advantage of upturn when it comes — CEO
● Sentiment towards Woolworths was high in the aftermath of the David Jones acquisition in Australia in 2014, when the South African company contended that a merger between the two brands would create a leading retailer in the southern hemisphere.
Synergies between the two companies were expected to deliver revenue of more than A$5.7-billion (about R51-billion), based on the 2013 financial year.
But a little short of two years after the deal, those plans became outdated as turning the David Jones brand around proved to a be mammoth task.
In the past two years, Woolworths has been the worst performer among its peers, with its share price declining almost 22%, while Truworths shares were up almost 23%, TFG rose 81% and Mr Price Group gained 78.9%.
Woolworths group CEO Ian Moir told Business Times this week that the weakness of the share price was partly due to problems at David Jones.
“In the past two years we’ve had the issues in David Jones and the economic downturn, and 42% of our profit is derived from Australia. Yes, we’ve made mistakes in David Jones but we are putting our hand up and we are fixing them. It’s not just about us continuing on and recognising where we got it wrong — it’s us saying yup, we got it wrong, we know how to fix it, and that’s what we are doing,” said Moir.
Woolworths admitted paying too much for the David Jones brand, with an impairment of A$712.5-million.
Charles Allen, a senior retail analyst at Bloomberg Intelligence, said Woolworths had not been able to completely rectify its mistakes at David Jones. “The most immediate issue was the flawed fashion mix in David Jones.”
He said it was apparent there was little future for mid-to-upmarket department stores that were operated on traditional lines.
In the past few years, Woolworths has invested heavily in David Jones, trying to adapt the business to the changing retail landscape. David Jones aims to increase the private-label sales contribution to total sales from 2.5% to 20%.
The company is reviewing its customer loyalty programme and replacing old information technology systems. It is also set to open its first standalone food hall, in South Yarra, Melbourne, in 2019.
So far, Woolworths has spent A$56-million to fix David Jones, while Country Road received a capital injection in 2017 of A$11million and Woolworths R619-million.
Moir said stores that were too large were being reduced in size. “So where space is not productive, we’ll take 13% out of it, and we’ve [already] taken 5% in the past six months.”
The group expects to open stores in Western Australia, where it does not have a presence, and New Zealand.
In 2018, the group will open four more David Jones stores, funded by landlord contributions.
“If you stop investing and doing the right things in a tough market, you are not in the position to take advantage of the economic upturn when it comes, and that’s exactly what we’ve been doing in Australia,” said Moir.
Until 2016, two years after Woolworths bought David Jones, the market grew 4% a year while David Jones grew at 8%, he said.
Nathan Cloutman, a senior industry analyst at ibisworld Australia, told Business Times this week that before Woolworths purchased it, David Jones was struggling in the subdued retail environment, which led to heavy discounting to clear stock, and this had affected profit margins.
“Company revenue then rebounded following the takeover of David Jones by Woolworths,” said Cloutman, citing the transformation strategy implemented, which led to a strong revenue increase in 2015-16.
“The company has struggled with the current weak retail environment in Australia, with its Australian businesses being limited by weak consumer spending and strong competition across the retail sector.”
In the past five years, consumer spending in Australia has been volatile, prompting the question why some retailers are getting it right while others are missing the mark.
Allen said Bunnings, a home improvement retailer owned by Wesfarmers, was the most successful retailer in Australia, regularly achieving same-store sales growth, high margins and a good return on capital.
Other retailers doing well include Kmart, a discount department store subsidiary of Wesfarmers, and JB Hi-fi.
“It is difficult to identify too many common features but, as usual, a merchandise offer that is compelling for consumers is very important. JB Hi-fi seems to have a very competitive cost structure,” said Allen.
But many put the blame for the poor direction at David Jones on Moir.
Moir responded: “I believe I’m the right guy for the job. What I believe doesn’t matter, it’s what the board believes and they are committed to myself, my team and the strategy. It’s a difficult question to answer because whether that happens or not is not in my doing.”
On Thursday, Woolworths’ interim results showed a marginal 2.5% increase in group sales to R38.8-billion for the first 26 weeks of the 2018 financial year. In the same period, headline earnings per share decreased by 15% to 206.3c, while the interim dividend was down 18.4% at 108.5c per share.
The share priced closed 0.6% lower at R65.01 on Friday.
The most immediate issue was the flawed fashion mix in David Jones
Charles Allen Bloomberg Intelligence senior retail analyst