Sunday Times

Woolies loosens David Jones chokehold

CEO Roy Bagattini sees ‘imminent’ fix to Australian problem


● Woolworths is on the brink of delinking the balance sheets of its Australian businesses, giving it far more options for dealing with its 2014 acquisitio­n, David Jones.

Until recently Woolworths was effectivel­y chained to David Jones. This was because David Jones was inextricab­ly linked to the Country Road business in Australia, whose assets were used as a cross-guarantee for the department store chain’s debt.

This meant if anything happened to David Jones it could drag down the far more profitable Country Road and potentiall­y harm the Woolworths group. It has already been a major drain, with Woolworths having impaired R13bn of the R21.4bn it paid for David Jones.

The JSE-listed retailer now has several options for David Jones. It could close it, reinvest in it or find a buyer for it.

Gearing in the Australian business has been slashed to A$83m (about R965m) in the 26 weeks ended December 27, from A$366m at the end of June last year, thanks to property sale-and-lease-back agreements in that country and other cost-cutting measures.

Woolworths Group CEO Roy Bagattini said the “separation of the covenant groups” of David Jones and Country Road “is imminent”, adding that it is contingent on the sale of the David Jones Elizabeth Street property in Sydney — and a deal to sell this store is expected “to close in the next few weeks”.

The proceeds of the disposal of the group’s Bourke Street property in Melbourne have already filtered through, with Bagattini saying the proceeds from Elizabeth Street will further cut its Australian debt and help the rest of the group.

Bagattini said this gives the group “a lot more breathing space to consider options” for David Jones.

“Should anything have happened to David Jones, it would have pulled the Country Road business with it. This covenant separation really gives us much greater flexibilit­y and optionalit­y, which is what our big priority has been,” he said.

Asked about options to sell or close David Jones, Bagattini said “it would be remiss of me not to contemplat­e or consider on behalf of the company all of our options”.

He said Woolworths was not “declaring anything just yet” but it would ultimately make “the right decision in the best interest of us as a group, and obviously our shareholde­rs in the process”.

Right now Woolworths is focusing on its turnaround plan for David Jones.

“We’ve also been starting to look at where we can generate a more profitable business through the David Jones brand and there are several things that are going on with David Jones as we speak,” Bagattini said.

“We are looking at taking significan­t levels of costs out of the business, we’ve committed to certain numbers and we are well on track with those.”

The David Jones food business “hasn’t been performing well and we are busy resolving that. If we get these things right, we would certainly position David Jones as a different propositio­n from an investment case point of view.”

In the latest 26-week period, David Jones’s sales declined 8.8% and by 10.5% in comparable stores.

Stephán Engelbrech­t, head of research at Anchor Group, agreed the “key thing” is that Woolworths has options.

“If they want to close David Jones they can now do it and still protect Country Road. That was the big fear … that they were backed in a corner and they were going to have to make David Jones work at all costs or otherwise lose a fantastic business in Country Road,” Engelbrech­t said.

Patsy David, head of research at All Weather Capital, said the interlinke­d debt covenants for David Jones and Country Road were a “big overhang” for Woolworths.

She said that on balance, the outlook for the Australian operations was a lot better now than before.

But the implicatio­ns of some of the company’s lease agreements in Australia were not so clear-cut, she said, and the terms of some of its new leasing agreements could be onerous.

Bagattini said last year in September that the objective was to secure rental deals that “were market-related or better”. However, David said “David Jones and Country Road still have a number of tough negotiatio­ns” ahead of them.

In the 26 weeks ended December 27, Woolworths’ adjusted profit before tax increased 24.6% to R2.7bn.

It said the figures were driven by a number of factors including an “outstandin­g performanc­e” from its foods business, the strengthen­ing of its balance sheet, stringent cost containmen­t and tight inventory management.

The group said it was also helped by “stimulatin­g trade through driving online sales and improving overall profitabil­ity”.

“In Australia, our cost management was also supported in part by a measure of negotiated rent relief and government support.”

Bagattini said Woolworths, which has appointed Manie Maritz to head its fashion, home and beauty division, will be adopting a far more focused, streamline­d approach to its fashion offering.

“As we go down this track, we are going to be doing what I call editing to amplify. This means trimming back on the labels we’ve got … and also some of the categories we’ve been playing in,” he said.

“We are too widely proliferat­ed and you can’t fight a battle on all fronts.”

If they want to close David Jones they can ... and still protect Country Road Stephán Engelbrech­t Head of research at Anchor Group

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 ?? Picture: Supplied ?? Woolworths is getting its ducks in a row at its David Jones department store chain with a plan to reduce risks by delinking the balance sheets of its Australian businesses.
Picture: Supplied Woolworths is getting its ducks in a row at its David Jones department store chain with a plan to reduce risks by delinking the balance sheets of its Australian businesses.
 ??  ?? Roy Bagattini, Group CEO of Woolworths
Roy Bagattini, Group CEO of Woolworths

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