S WOBBLES
herne, portfolio manager at Vestact Asset Management. “Patience and the market don’t go together. For the short term [it looks like] they probably overpaid a bit for the asset, compounded by the R421m cost of the rights issue and the dilution effect of the extra shares.”
But, Treherne adds: “I think in the long run, the purchase of DJS will work out well.”
It won’t be easy. In a research note two weeks ago, Jpmorgan warned of the “higher than average execution risk for this business”, citing the numerous things Moir will have to get right for it all to work out.
Of Woolworths’ problems, some are selfinflicted and others are external. The company put in place optimistic targets of R1.4bn it expected to make from the deal, claiming it would place up to 20% of its “private label” products in DJS stores.
So far it has been a bust. It has been the worst time to try to execute the largest-yet deal in SA retail history. As Vestact put it, “people don’t splash out on new wardrobes when bank balances are low and when they don’t feel good about their job”.
The underlying fundamentals, however, are weak, and consumers just are not spending as much on clothing as they used to. And when they do spend, they are picking perceived value retailers like H&M and Cotton On.
The SA clothing arm of Woolworths generates a third of the group’s profits — more important to the bottom line than food, which accounts for more revenue but only 24% of the profits.
Under Christo Claassen, Woolworths’ SA clothing division had taken some positive steps: it had built credibility in the fashion market and shortened the lead time between ordering the clothes and having them in the store. Today, about 70% of its womenswear business has a lead time of 6-8 weeks.
But grim consumer sentiment meant that nonetheless, for its year to June, Woolies’ SA clothing division’s volumes fell 7.5%. This was better than Truworths (down 10%) or Mr Price (down 10.6%), but still nasty.
Damon Buss, an equity analyst at Electus Fund Managers, says Woolies’ clothing and general merchandise business is “mediocre”.
“They are selling 25% fewer same-store units than they did 10 years ago. They also lowered their medium-term margin guidance from 18% to 16%-17%, which is necessary if they are going to hold their market share in SA, which is currently around 12%.”
Operating profit was down 6% and sales grew just 1.4% in the Woolworths clothing and general merchandise division. On the plus side, gross margins were well managed, down only 40 basis points to 47.9%, helped by efficient local sourcing and promotional activity.
But the clothing business should be helped by its DJS partnership. Thanks to this tie-up, its share of the beauty business, cur- rently a paltry 3%, is set to grow as it has signed brands including Chanel, Estée Lauder, Jo Malone and La Mer, which will be put into 34 stores by the end of the year.
Says Moir: “We’ve put this into 14 stores so far. Customer feedback has been incredible. Zyda [Rylands, SA CEO] and I were at Canal Walk [Woolworths] and a customer said, this is fantastic, I can come here now and I no longer need to go to Edgars.”
It’s some vindication for Moir’s “complete shop” strategy, which many thought was bonkers.
But it is Moir’s expansion of the food business that has been his biggest winner.
The plan to extend “stock-keeping units”, a revolving group of 7,500 food products on sale at specific times, is thriving.
The result: operating profit at Woolies’ food business grew by a solid 8.3% and revenue by 8.6%.
It’s a savvy move, since food retailing is in many ways the last bastion of spending in tough times. The landscape is highly competitive, with old foes like Pick n Pay on a recovery path and new ones like Shoprite’s Checkers muscling in (see page 24).
Victor Mupunga, a research analyst at Old Mutual Wealth Private Client Securities, says the Woolworths Food customer is resilient — which is why the company was able to push price increases of about 8%.
“Woolworths has been adding new space quite aggressively,” he says. “Most peers were not able to do that, which, coupled with Woolworths’ higher margins relative to peers, is an indication of the health of the SA food business.”
Mupunga warns that growth in the second half of the year was weaker than in the first, which suggests “trading could still get worse”.
This is especially concerning as Shoprite targets the same high-net-worth customers who traditionally buy food at Woolies. “We