Aggressive discounting hits Woolies’ margins
LISTED retailer, Woolworths is bracing itself for a tough second half to its financial year as its South African and Australian markets continue to be driven by aggressive discounting, which often squeezed margins.
Woolworths yesterday reported a 6.7percent increase in sales to R37.8billion in the 26 weeks to December 25. Profit before tax, which increased by 37.9 percent was boosted by Woolworths-owned Australian department store chain, David Jones’ sale of its Market Street property in Sydney, Australia.
Woolworths’ headline earnings a share in the six months dipped 4.4percent. The group maintained an interim dividend of 133c a share.
Woolworths’ chief executive, Ian Moir said yesterday the company would continue to grow its revenue in a competitive environment.
“With the ongoing transformation of David Jones, some encouraging signs in Country Road and the continued success of our food and clothing offer in South Africa, we are confident of maintaining our position as the leading Southern Hemisphere retailer,” Moir said.
He said sales of the group’s clothing and merchandise grew by 3.5percent, and food sales had grown by 9.5percent.
David Jones sales increased by 4percent, Woolworths said. Woolworths acquired David Jones in 2014.
David Jones’ profit before tax increased by 2.9percent to A$105 million (R1.1 billion).
The food business grew profit before tax by 7.5percent to R919m, while the clothing and general merchandise business increased profit before tax by 4.8percent to R1.2bn.
Moir said he expected the retailer to have a difficult second half of the financial year, with the South African and Australian markets expected to continue to be “promotionally driven”, whereby retailers boosted sales through promotions.
He said a warmer winter left many retailers with enormous stock, thus encouraging aggressive discounting. The Australian market was particularly competitive with a number of international retail brands and online retailers.
He said the company was addressing problems associated with the implementation of a David Jones private label.
Woolworths launched the private labels at David Jones stores after acquiring the retail chain as part of a strategy to grab a piece of the specialty retail market.
Moir said the roll-out of the private labels did not go completely according to plan. He cited “system issues” and problems with the flow of products.
“These issues have now been fixed. There are much better sales now.”
He said the company got about 90percent of the roll-out of private labels right.
Bright Khumalo, a portfolio manager at Vestact Asset Management, said yesterday Woolworths was exposed to the fast fashion segment of the market which was extremely competitive. “This is where players such as H&M are taking away market share.”He said while promotional sales were a boon for consumers, these tended to hit retailers’ profits hard. Khumalo said he expected competition in the food market to be intensive in the second half of the financial year as the retailers’ jostle for consumer spend was likely to intensify.
Woolworths shares dropped 3.94percent on the JSE yesterday, to close at R70.50.