Spending among resilient consumers in the higher income brackets could be hampered by possible further interest rate hikes, Woolworths chief executive Ian Moir said yesterday.
However, should this happen he said Woolworths, which has outperformed its competitors both in the clothing and food spaces, would be able to cope with the consequences.
Moir described these high-end customers as well off and not affected by the pullback in unsecured lending.
“They are more confident than the lower end of the market and, as a consequence, they are continuing to spend.
“More and frequent quantum of interest hikes will affect customers. What you do when that happens is you make sure that your business is well placed and able to deal with the downturn.”
Moir believes Woolworths has improved its game and is a different company than it was six years ago.
“We are able to deal with any downturn in the market. To be a good business, you need to perform when times are tough as well as when times are good,” he said.
Woolworths was able to lift its sales for the 26 weeks to December 29 by 16.2 percent to R19.3 billion. Profit before tax rose 21 percent with earnings a share increasing by 17 percent to R1.912. The company’s headline earnings a share rose 17.2 percent to R1.924.
The group’s clothing and general merchandise business increased sales by 9.7 percent, which, according to Woolworths, was ahead of the local apparel market.
Food sales grew by 15.3 percent with a price movement of 7.2 percent, while food gross profit margins fell 0.2 percentage points to 25.2 percent.
Simon Anderssen, an investment analyst at Kagiso Asset Management, said the result was short of what the market had been expecting.
“It is fair to say that Woolworths is trading relatively better than its peers in the food business, because it targets the more resilient upper-income consumer.
However, Anderssen noted that sales growth slowed significantly towards the end of last year in food and this result showed a decline in gross margin for the food division.
“Management attributes this decline to an investment in price, which suggests the need to lower price points to support growth in volumes,” he said.
On a possible interest rate hike and its impact on Woolworths customers, Anderssen said upper-income customers were most exposed to increasing interest rates.
“Higher future interest rates will impact their level of spending and it is reasonable to expect these consumers to also cut back on high-margin prepared foods,” Anderssen said.
He added that although Woolworths had done a good job of broadening its offer and capturing more of its customers’ grocery spend, future margins would be affected by declining sales in high-margin products.
Woolworths’s financial service debtors’ book reflected a year-on-year growth of 13.8 percent, which Moir said was strong and quality growth. “Impairments were normalising between 4 percent to 5 percent. This was an indication of our risk appetite,” he said.
Woolworths shares dropped 3.90 percent yesterday to close at R58.97. The general retail index fell 2.07 percent.