As good as it gets?
Woolworths has done the fixing it needed now what?
The two divisions of Woolworths that needed urgent attention are well on their way to being sorted: David Jones is sold; and the fashion business is on track with its turnaround.
The worry, now, is that the star performer food is coming under pressure.
That may explain the recent weakness in Woolies shares. Until now the strongest performer among South African retailers, the stock has shed about 10% over the past week, despite posting a 15% rise in turnover, a 75% jump in headline earnings per share and a near doubling of its interim dividend.
It means that Woolworths stock is up just 7% year to date, though over three years the share has gained 114% on a total return basis.
Casparus Treurnicht, portfolio manager and research analyst at Gryphon Asset Management, says results were in line with expectations, but it was disappointing that no year-to-date numbers were provided. “Investors are anxious about the sector, and I think they are craving more specific forward guidance.”
Treurnicht has become increasingly downbeat about local retailers. “In my opinion we are not going to get growth numbers like we did for the past 20 years. Those days are gone.”
Take Woolworths Food. Volumes were down less than those of its competitors, but the market fears that the pain of unrelenting load-shedding is still to be fully felt, as consumers increasingly struggle to make ends meet. “It is simply too expensive for the average consumer to shop there,” says Treurnicht.
It is expensive to maintain the company’s quality cold chain too. Over the interim reporting period, the group experienced 157 days almost 4,000 hours of load-shedding, with diesel costs at R20m-R30m a month. Woolworths has just over 400 generators, covering most stores nationwide.
CEO Roy Bagattini, inevitably, has a totally different view of Woolies’s perennial appeal.
“What we’re seeing increasingly is that a lot of customers who may have loved us and left us have come back to us. They trust the brand, the proposition; the quality is unmatched.
“We’ve got the holy grail of food retailing and that is the DNA of our food business. We don’t worry about market share; it’s not
the pre-eminent thing for us. We go for [greater] share of profits and for quality over quantity — that’s what makes money for shareholders.”
Like-for-like food sales rose 5.4%, while prices were up 6.8%. Overall food sales, including new stores, grew 7.6%. Black Friday was strong, while sales worth R1bn were recorded in the Christmas week alone.
Bagattini says the food division will focus on taking availability to a different level. This is not just about ensuring that products are on shelves, but about advanced analytics, and getting the right products to the right place.
“There is so much good we do and don’t communicate about. Our competitors have a loud share of voice and they shout out; historically we haven’t done that.”
Presumably he is referring to Shoprite’s Checkers division, whose Sixty60 delivery service is undoubtedly cleaning up. According to Shoprite’s results released this week, the retailer grew its South African supermarket sales a cool 17.5%, and 11.1% on a same-store basis. Intriguingly, Shoprite’s selling price inflation — at 9.4% — was higher than Woolworths’s 8.4% rise. Sasfin retail analyst Alec Abraham says what may happen is that Woolworths Food may end up having the lowest decline in volumes as a result.
As for the fashion, beauty and home business (FBH), Bagattini says they are “about halfway through what we want to do”, and maintains that turning around the division presents “the single biggest opportunity to reset value for the group”.
Woolworths has doubled the beauty business in the past five years and will double it again in three years.
Treurnicht says the FBH division produced good gross profit margins, given lower markdowns, as well as good cost control, resulting in operating profits increasing 25.5% and operating profit margins rising to 13.1% from 11.6%.
Woolies is planning to roll out smaller W Edit stores, sized 300m²-400m², that offer a selection of products in areas such as Giyani, Thembisa and Irene.
“Eight of them are up and running. They trade much more productively, and are margin accretive,” says Bagattini. These shops generally have short-term leases and can respond quickly to changes. Bagattini expects to open about 30 of these before year-end.
Yet All Weather Capital’s Chris Reddy is finding it hard to get excited, and has forecast slower profit growth in the next six months.
Time, perhaps, to cash in on the run?