The Big Read Woolies wobbles as Aussies jump ship
Board backs Moir but tough talk likely behind the scenes
● On Thursday, Ian Moir faces the difficult task of selling yet another approach to rescuing the fortunes of Woolworths’ troubled Australian subsidiary, David Jones, after a spate of resignations in recent weeks unravelled previous plans for a turnaround at the almost 200-year-old department store.
Moir presents the company’s interim results in Cape Town this week, after warning shareholders in January that headline earnings may fall as much as 5%.
Though some of Woolworths’ biggest shareholders are keeping mum and the board is still backing their CEO, who led the acquisition of the department store chain founded in 1838, analysts have suggested that there may be some robust discussions behind the scenes regarding his future.
Moir was appointed in November 2010 and some four years into his tenure took the company into Australia as part of an ambitious plan to make Woolworths one of the largest retail players in the southern hemisphere. It’s a plan that has so far failed to bear any fruit and since the company’s shares peaked in November 2015, they have plunged 57%. Over that same period, the general retailers index has fallen 28%.
Struggles at home stemming from low growth and fashion misfires have only served to compound difficulties that the retailer has faced in recent years.
This week Woolworths announced the shock exit of two Australian nonexecutive directors, Gail Kelly and Patrick Allaway, leaving the board with no expertise in a market that is facing some significant structural challenges, except for Moir.
Their resignations came just days after David Thomas, the CEO of Australian business David Jones, resigned last week for “personal reasons”.
David Jones has now gone through three CEOs since Woolworths purchased the department store which, like many in the developed world, has faced an onslaught from nimbler and smaller players and the rise in e-commerce. Last year, Amazon entered the Australian market and international entrants such as H&M have also proved fierce competitors.
The string of recent resignations has introduced uncertainties about “what the acThe tual prognosis for the business is. The key concern is that you’ve had, in succession, a couple of directors leaving and it immediately just raises so many questions,” said Alec Abraham, senior equity analyst at Sasfin Securities.
Woolworths is publicly backing Moir, saying in a response to questions on whether he is headed for the exit that “the board remains confident that Ian is best placed to deliver the turnaround strategy and continues to support him and our executive leadership team, who are highly experienced and keenly focused on the transformation and growth of our businesses”.
The company also said this week it had no plans to sell David Jones and was confident it had the right plans and team to help deliver on the company’s turnaround strategy.
But Damon Buss, an equity analyst at Electus Fund Managers, said he would be surprised if the Woolworths board wasn’t having strong conversations with Moir at the moment.
“A few years of poor performance from the South African clothing division and Australian David Jones have resulted in substantial destruction of shareholder value. If you’ve lost your third CEO [in four years of owning David Jones in Australia] and a week later your two Australian board members resign with immediate effect, it implies all is not well with the business.”
Another analyst, who declined to be named, said the growing incidence of decisionmakers at David Jones and Woolworths being “removed” or leaving smacked of desperation.
“If I look at the Australian economy, they’ve come off the back of huge and long growth. I don’t think Woolworths is the only company where an acquisition strategy has destroyed significant value.”
The company’s two highest-profile shareholders after the Public Investment Corporation, Allan Gray and Coronation, declined to comment.
When Moir expressed interest in what is known as the oldest department store in Australia, David Jones was already struggling from three consecutive years of falling profit and muted sales. Steering the business to significant growth and profitability was always going to be a massive task.
At the time of the acquisition, the retail company assured shareholders that initiatives were expected to deliver incremental earnings before interest and tax of at least R1.4bn a year within five years. Instead, the retailer last year was forced to impair the value of its Australian department store chain by nearly R7bn.
According to the Financial Review, profit at David Jones has more than halved since the takeover, falling from A$161m (about R1.6bn) in 2015 to A$63m last year, with further declines expected this financial year. Woolworths had initially forecast earnings growth from David Jones of between A$130m and A$170m by 2019.
Abrahams said that “with hindsight, it turns out that in practice the operational changes appear to have been far more disruptive to the business than anticipated, with some costly mistakes along the way. This was also compounded (and complicated) by the severely difficult trading environment. So in some way the acquisition’s timing was unfortunate.”
Efforts to revamp the brand that were being led by now departed CEO Thomas included an A$200m overhaul of its flagship store in Sydney, with the boardroom being converted into a champagne bar overlooking a “shoe heaven” inspired by European department stores to make it more of a destination attraction.
Regarding who could possibly lead Woolworths in place of Moir, Buss said: “We don’t see an internal successor. Running the two divergent South African businesses [apparel and food retail], an Australian apparel retailer [Country Road Group], and a struggling Australian department store requires a very specialised skill set and we think the global talent pool capable of leading this group is very limited.”
If Moir is replaced by an internal candidate, there’s seemingly only one standout contender, in the form of Woolworths SA CEO Zyda Rylands.
For many analysts, Rylands is an unknown quantity, but Reuben Beelders, fund manager at Gryphon Asset Management, rates her very highly. “She’s incredibly hardworking. I think if I look at her ability relative to other management, she’s more than capable.
“She has an unbelievable work ethic, she’s sharp and committed. She’s focused on the business.”
SA’s retail market is also causing headaches for Woolworths, which the company likely anticipated when it did the David Jones deal.
“The reality is they [Woolworths] saw the South African market coming off hard. Now we are in that exact position,” said Beelders.
Whether Woolworths wanted to grow in order to prevent it being taken over by a foreign competitor, or get bigger to attract the attention of a foreign competitor as a possible takeover target, was unclear.
But whatever Woolworths’ plan was, it is a long way from working out.
We think the global talent pool capable of leading this group is very limited
Damon Buss Equity analyst at Electus Fund Managers