DESPITE a slowdown in the economy, consumers in the higher end of the market have shown a resilience that helped Woolworths post a strong revenue increase for the 52 weeks to June 29.
However, group chief executive Ian Moir cautioned that a further interest rate hike and African Bank’s woes could muddy the waters.
The group grew sales by an annual 14.4 percent on a 52-week basis to R39.7 billion with adjusted profit before tax up 20.1 percent to R4.4bn.
Headline earnings a share grew by 9 percent to R3.652, while earnings a share increased 10.5 percent to R3.673.
“Things are still going to be difficult for the credit-based retailers, as well as customers in the middle and low end of the market,” Moir said of the trading environment after African Bank’s bailout.
Reuben Beelders, a portfolio manager at Gryphon Asset Management, agreed that the upper end of the market was proving resilient. However, he was less optimistic about its future prospects.
He said the poor economic growth being experienced in South Africa would ultimately catch up with the upper end of the market in the form of reduced bonuses and profits, as strikes and lower activity levels affected corporate profits. A possible interest rate hike might also have an impact.
“Over the past few years very different dynamics have impacted the lower versus upper end of the market. A few years ago, coming out of the financial crisis, upper end consumers were coping with high debt levels and a constrained economy while lower-end consumers were benefiting from the government’s roll-out of social grants,” he said.
Woolworths said it was ready to execute its strategy of being the largest fashion retailer in the southern hemisphere. The first point of call would be the strengthening of group sourcing, as well as taking its private label to David Jones stores in Australia.
Moir said one of the priorities for the new Australian business, David Jones, was to raise productivity. Woolworths would also introduce its rewards scheme to the market.
However, the biggest task at hand was to introduce its private labels to David Jones customers, which Moir described as similar to those in the South African market.
“We plan to take some of our successful brands such as JTOne and Studio W to the David Jones environment, which would be much more profitable and more successful than other brands David Jones has at the moment,” he said.
Moir said of the $130 million (R1.4bn) a year in merger gains that the group hoped to achieve by its fifth year, about $100m would come from those two tasks. This meant that Woolworths would have to increase its sourcing.
“We source from a mix of local producers, as well as China and India, which we are not going to change. But what will change would be the volumes that we are putting through our supply relationships. This should result in good relationships and lower production costs, which would then be passed down to our customers,” Moir said.
Food sales increased by 14.8 percent, with price movement of 7.9 percent. However, the division’s gross margin was reduced by 0.3 percentage points to 25.3 percent due to investment in reduced prices and increased promotions.
Moir said the food division had been able to achieve a significant increase in sales with growth ahead of the market.
“More importantly we have been able to improve profitability of the food business. As our volumes have grown our operating leveraging has increased, so the profitability is better than four years ago,” he said.
He added that the strategy to expand and build supermarket stores was gaining traction.
Meryl Pick, a retail analyst at Old Mutual Equities, said these were exciting times for Woolworths’s Country Road stores, which accounted for 20 percent of profits.
Pick said David Jones was ripe for a turnaround and, “if anyone can do it, it is Moir. He knows Australian retail very well and has proved that he can turn businesses around.”
Beelders felt that Woolworths’s results reflected good execution on the part of management, coupled with some base effects on acquired businesses and margin expansion.
However, the diluted headline earnings a share growth, at 8 percent, was less stellar and more in line with the rest of the retail sector.
Going forward, investors would have to factor in the increased shares in issue as a result of the rights issue and the inclusion of the acquired David Jones business.
The shares rose 1.97 percent to close at R79.06 yesterday.