It’s now Woolies’ time to turn the cor­ner

Cape Times - - OPINION & ANALYSIS - Amelia Mor­gen­rood

WOOLWORTHS at R50? The first time the share broke through this level in June 2012, it had a spec­tac­u­lar pe­riod of growth and reached R100 just three years later in the last quarter of 2015. Now three years later again it is back to square one.

Later this month they will re­lease ful­lyear re­sults, hope­fully, the worst, and start turn­ing the cor­ner.

The trad­ing state­ment is­sued three weeks ago told the in­vest­ment com­mu­nity that it was a chal­leng­ing year, with tough trad­ing con­di­tions in South Africa and Aus­tralia, and prob­lems in the wom­enswear depart­ment. The Fash­ion, Beauty and Home sales de­clined by 2.9 per­cent in the sec­ond half. Full-year com­pa­ra­ble store sales were 4.1 per­cent lower.

Coun­try Road

Coun­try Road sales in­creased by 1.7 per­cent for the year, but com­pa­ra­ble store sales, which ex­clude the menswear brand Poli­tix ac­quired in Novem­ber 2016, de­clined by 1.8 per­cent. On­line sales in Coun­try Road now rep­re­sent 18 per­cent of sales with growth of 20 per­cent over the year.

David Jones sales in­creased by 2.2 per­cent in the sec­ond half; this is de­spite the sales dis­rup­tion from the re­fur­bish­ment of the El­iz­a­beth Street store in Syd­ney which will con­tinue un­til De­cem­ber 2019.

Th­ese are hope­ful fig­ures – the fact that the sec­ond half went bet­ter in­di­cate that they might be turn­ing the cor­ner in Aus­tralia. A feather in the David Jones hat was on­line sales which grew 21.4 per­cent, con­tribut­ing 5.3 per­cent of sales.

What did not sur­prise was the South African food divi­sion that did very well, in­creas­ing sales by a mar­ket-lead­ing 8.4 per­cent. Com­pa­ra­ble store sales were up 4.8 per­cent, and in a coun­try where there is lit­tle eco­nomic growth, this is a fan­tas­tic achieve­ment. The choir of voices say­ing that it is the “end” of the depart­ment store era might be on the wrong track. Break­ing a cul­ture is not so easy – if look­ing for qual­ity food, home­ware and cloth­ing, and con­ve­nience, the road will al­ways lead you to a Woolworths store. Es­pe­cially in to­day’s fast-track­ing times.

Cost review

In July David Jones said that fol­low­ing a strate­gic cost review, it would con­sol­i­date its man­age­ment and head of­fice teams “to pro­vide a flat­ter, more cus­tomer-fo­cused struc­ture”.

It had dis­missed its manag­ing direc­tor for cloth­ing and gen­eral mer­chan­dise, David Collins, just a month af­ter Woolworths axed its chief ex­ec­u­tive, John Dixon. It had also cut an­other 15 jobs at its head of­fice, in a bid to re­duce costs and sta­bilise the busi­ness.

2018 might be the year Woolworths will show us that they will not end up in the Aus­tralian grave­yard. They com­pleted im­por­tant David Jones busi­ness trans­for­ma­tion ini­tia­tives, im­ple­mented new in­ven­tory and on­line sys­tems, the repo­si­tion­ing of the foods busi­ness, and the head of­fice re­lo­ca­tion. The gross mar­gin and cost ra­tio can only ben­e­fit go­ing for­ward.

Un­for­tu­nately, we will not see im­me­di­ate re­lief in the val­u­a­tion lev­els of Woolworths; head­line earn­ings per share for the com­ing re­ported pe­riod will be down as much as 20 per­cent, due to the A$712.5 mil­lion (R7.29 bil­lion) im­pair­ment charge on the car­ry­ing value of David Jones in the first half of their fi­nan­cial year.

Write down

The ques­tion re­mains about whether they will have to write down more of the cost of David Jones in their books? Four years ago Woolworths bought David Jones for R20bn, but wrote down R7bn ear­lier this year.

Woolworths is fun­da­men­tally a great busi­ness – I know of few peo­ple who do not en­joy shop­ping at a Woolworths or have not been in a store in the last month, es­pe­cially the food divi­sion.

The David Jones mis­take might soon sub­side, and re­store Woolworths to its former glory. The share is ne­glected, un­der­stand­ably, as it is dif­fi­cult to see earn­ings growth in the next six months.

Amelia Mor­gen­rood is a PSG Wealth fi­nan­cial ad­viser based in Pre­to­ria. Views are of the author and not nec­es­sar­ily the gen­eral view of the en­tire PSG en­tity. Woolworths shares are held in her own ca­pac­ity and on be­half of clients.

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