TRADE OF THE MONTH
Shoprite still looks a much better option than Woolworths
It’s been a painful time for those who bet on Woolworths two years ago as they have seen its share price slide more than 40%.
For investors who opted to back Shoprite, it has been a different story. Their confidence has been rewarded by a 60% rise in the retail giant’s share price over the past two years.
While this huge divergence in share-price performances is unlikely to be repeated over the next two years, Shoprite still appears to be the share to back and Woolworths, which faces multiple challenges in SA and Australia, the share to avoid.
In the 53 weeks to July 2 Shoprite romped home with headline EPS (HEPS) up 16.1% on a 52-week basis.
Woolworths, in its worst showing in a decade, limped in with HEPS in the 52 weeks to June 25 down 7.6%. HEPS fell 5.5% short of the minimum hurdle set for executives to receive incentive payments.
In SA, Woolworths scraped home with profit before tax (PBT) up a marginal R24m to R4.4bn. It came thanks to a commendable 8.3% rise in its food division’s PBT to R1.98m, offsetting a 6% fall in the clothing division’s PBT to R2.17m.
Woolworths’ biggest setback was in Australia, where the combined PBT of its David Jones (DJ) department-store business and fashion retailer Country Road Group slumped R600m (21%) to R2.24bn.
The big damage was done by DJ, acquired by Woolworths in 2014 for R21.4bn.
“DJ is a disaster,” says Evan Walker of 36One Asset Management. It’s hard to argue with him.
DJ’s PBT, after coming in flat at the half-year mark, went on to collapse 73% in the second half. This left the year’s total down R595m (29.5%), at R1.28bn.
At a results presentation, Woolworths group CEO Ian Moir put a positive spin on DJ’s prospects. In part, he is pinning his hopes on a just-completed customer relationship management (CRM) system.
“It will transform the business,” he said. “DJ has never had a CRM system until now.”
Woolworths is backing its optimism on DJ with an A$200m (R2.1bn) upgrade of its flagship Elizabeth Street store in Sydney. It will really have to earn its keep to make a decent
David Jones will not have the clear runway Woolworths had when it entered the highend food sector three decades ago
return. The upgrade cost equals Woolworths’ total capex spend on SA operations in the past financial year.
DJ is also rolling out top-end food outlets in its stores in a programme set to cost A$100m over three years. “We will have the best food offering in Australia,” says Moir.
Perhaps. But DJ will not have the clear runway Woolworths had in SA when it entered the high-end food sector three decades ago.
“Australia is not like SA,” says Walker. “There is an abundance of owner-operated food stores in the top end of the market and they have very loyal customers.”
Also in doubt is the department-store model itself. Department-store groups in the US and UK are struggling. In SA, Stuttafords threw in the towel in May.
The outcome of Woolworths’ department-store venture in Australia is far from certain. It represents a risk investors should certainly not take lightly.
Investors should also be aware of the challenge that Woolworths faces in its core LSM 8-10 segment of SA’s food market. It is a segment in which Woolworths’ R27bn annual sales food division has long held sway.
Shoprite aims to change that. “Woolworths is not a specific target,” says Shoprite CEO Pieter Engelbrecht. “We just want more of their customers.”
Spearheading Shoprite’s drive into the upper-end food segment are its new-generation Checkers stores. Eight opened in the past year with 14 more coming in the current year. It will take total Checkers store numbers to 223.
“With its new-generation Checkers stores Shoprite has got its fresh produce and store configuration spot-on,” says retail analyst Syd Vianello. “They will give Woolworths a run for its money.”
Shoprite’s clout in the market is set for another boost as part of the newly listed Steinhoff Africa Retail. It brings together the powerful combination of Shoprite and Pepkor as its key components. “We will immediately start generating supply-chain synergies with Pep,” says Engelbrecht.
This is particularly so in Africa, where Shoprite has 386 stores in 14 countries and Pepkor more than 300. “We will leverage our advantage in Africa,” says Engelbrecht. “Shoprite has 21 new stores coming, 45 confirmed and another 166 potential stores.”
But even this pace is not fast enough for Shoprite. It is eyeing Eastern Europe — where its controlling shareholder, Steinhoff, has a 975-store footprint through its Pepco brand.
“Poland, Slovakia, Czech Republic, Romania and Hungary will be considered,” says Engelbrecht.
But the retailer will not bet the house. “If we go ahead we will begin small,” says Engelbrecht. “If it doesn’t work out we can write it off and walk away. I won’t pull a David Jones on Shoprite.”
Of course, DJ could yet prove to be a winner for Woolworths. Time will tell. But for now Shoprite looks like a far safer option as a company likely to sustain growth momentum at a cracking pace.