Nompumelelo Magwaza
Woolworths’ acquisition of the Witchery Group through its Australian business Country Road was a good strategic move and could see the retailer expanding internationally, retail analysts said yesterday.
Witchery, which includes about 210 fashion stores and a number of Mimco brand accessories stores, was bought for A$172 million (R1.5 billion) from Gresham Private Equity, the retailer said yesterday.
Daniel Isaacs, an analyst at 36One Asset Management, said Woolworths’ investment in its Australian operations could prove to be a good strategic move given its foothold in that market through Country Road.
“Additionally, this could assist them in increasing Country Road’s operational efficiency through increased scale and cost synergies, which would be significantly value enhancing given Country Roads dilutive effect on group margins.”
He said one reason why Australian retail was a tough market was because Australians were comfortable buying apparel items online.
“The high penetration of, and comfort with, the internet means that they can buy internationally online using a strong local currency, which puts pressure on (the) locally-based retailer,” he said.
Woolworths chief executive Ian Moir said: “The acquisition of Witchery Group creates one of Australia’s largest specialty fashion retailers with complementary brands and a strong position in the mid to upper tier specialist retail sector.”
He said the timing was good for such an acquisition given the positive response received from the Australian retail market through Country Road.
Moir added that Witchery would be a profitable business and would reflect the value of the acquisition in the future.
The acquisition would help consolidate Country Road’s position ahead of the expected economic recovery in Australia. At the moment, Australia’s apparel market was at a cyclical low, Woolworths said.
Simon Anderssen, an equity analyst at Kagiso Asset Management, said the deal was positive for Woolworths. “Witchery is one of Australia’s leading fashion brands and has been successful in achieving operations margins of 12 percent to 13 percent in an extremely competitive environment. This acquisition will increase Country Road’s Australian market share to around 5 percent.”
He said management had indicated that combining the two businesses would result in cost savings, which would support profitability at a time when consumption spending in Australia was weak.
According to Woolworths, Australia’s specialist apparel retail market is estimated at A$12.1bn and the population is expected to grow from 23 million to 35 million by 2050.
The Witchery Group delivered A$266m in revenue and A$34m in normalised earnings before interest, taxes, depreciation and amortisation last year.
Nedbank Capital analyst Syd Vianello said the Witchery label had already entered the South African market through up-market retailer Stuttafords.
“It is obvious that with this new deal between Witchery and Woolworths, the trading agreement between Stuttafords and Witchery will not last. It would also not be a surprise to start seeing Witchery clothing alongside Country Road and other up-market labels at local Woolworths stores.”
Chris Gilmour, an equity analyst at Absa Investments, said Woolworth’s chief executive knew what he was doing because he had been at the helm of Country Road before coming to Woolworths.
Woolworths shares fell by 0.56 percent to close at R53.50 yesterday, but it still did better than the general retailers index, which shed 0.63 percent.