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Your food is great, Woolies, but the clothes? Tsk, tsk


Your food is great, Woolies, but the clothes? Tsk, tsk

Hero to zero in four short years and the culprit, once again, is that graveyard of SA retailing: Australia

Chris Gilmour

It is amazing how Woolworths has gone from hero to zero in four short years and the culprit, once again, is that graveyard of SA retailing, Australia. Only one SA retailer, being Metcash, has ever managed to get it right consistently and sustainably in that country.
Most investors thought it would somehow be different this time, as Woolies’ current CEO, Ian Moir, did a great job of turning around the fortunes of its Country Road operation in Australia. So, when the retail group bought Australian department store operator David Jones a few years ago, the market gave him the benefit of the doubt. However, the department-store concept is dying globally.
In a trading update issued mid-July 2018, Woolies estimates that headline earnings per share (HEPS) for the year to end June would decline by between 15% and 20%.As usual, food stood out as the star performer, with comparable sales increasing by 4.8% against a background of 3.2% food inflation, meaning that in real, comparable terms, food sales rose by 1.6%.  Although that might not sound like a lot, there are precious few food retailers in SA currently exhibiting that type of positive real growth.
Woolies “Fashion, Beauty & Home” had a very poor performance, largely due to missteps in womenswear. Comparable store sales fell by 4.1% with inflation of just under 1%. Country Road comparable sales fell by 1.8% and David Jones comparable sales fell by 0.4%.
Woolies bought David Jones for A$2.1bn in 2014 but a humungous A$712m impairment on the acquisition was recently announced, and just a few years after the transaction. This value destruction relates to “the economic downturn, intense competition and promotional activity and poor/delayed execution of certain key initiatives”.
In the interim results to end December 2017, shareholders’ equity declined to R12.2bn from R19bn a year earlier, thanks to the impact of this impairment. Net debt remained largely the same at R11.7bn but gearing, of course, shot up from 60.4% to over 95%.
The operating results trend is also worrying. The pattern for the past two years is that HEPS have been persistently falling at each comparative six-monthly stage, and this is accelerating.Woolies is a company that most South Africans care about deeply. Hugely iconic, it is the highest quality food retailer in the country and nothing comes remotely close – not in terms of fresh food, convenience food, nor store layout. It is a challenge for other retailers to compete with its food offering. Checkers is giving it a go, and in the past decade Pick n Pay came badly unstuck with its efforts in this regard. 
But Woolies’ local clothing division has been a perennial problem. Sometimes they get it right, but not consistently and sustainably. With Australians now saving less, banks are being forced to look elsewhere to fund their mortgage books, with a concomitant rise in interest rates. Not only will highly-indebted Australian consumers soon be paying more mortgage interest, but corporate borrowing in Australia will also become more expensive, affecting Woolies’ interest burden.
The Woolworths share price has halved since 2016, now sitting at around R52, and opinions vary as to where it will now go. Having fallen so far, so quickly, there seems a reasonable chance from a pure trading perspective that it may experience a bounce of sorts. But that scenario would require a relatively buoyant local consumer economy and a big turnaround in the fortunes of David Jones.
There is a poor technical picture for the group. Since peaking at over R105 in 2016, the stock has experienced a set of progressively weaker attempted recoveries and may well go lower before finally turning around.

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