It’s now Woolies’ time to turn the corner
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 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.
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.
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.