File picture: Mike Hutchings/Reuters
JOHANNESBURG - It has been a painful time for Woolworths investors since late 2015, when the share price reached a high of R100. Since then it has dropped 40 percent and has been hovering around the R60 level for most of this year.

Woolworths was established in 1931 and there are 703 stores in South Africa (including 72 Engen stores) and 87 in the rest of Africa.

Retailers were among the biggest beneficiaries of Ramaphoria, and then lost a little steam again, but Woolworths didn’t really participate in this.

Woolworths is a strong and popular domestic brand and has an attractive portfolio of operations with an impressive track record.

The group’s entry into Australia has, however, been a painful time for Woolworths investors since late 2015, when the share price reached a high of R100.

Since then it has dropped significantly, bobbing around the R60 level.

Woolworths paid R21.4 billion for David Jones in 2014, and three years later wrote down R6.9bn of this amount.

This can be attributed to the cyclical downturn and structural changes which affected the Australian retail sector, combined with the delayed execution of certain key initiatives.

Divisional Overview

WOOLWORTHS FOOD (WHLF)

WHLF remains the group’s star performer and contributed 41 percent to group sales and 30 percent to operating profit. Sales continued to grow ahead of the market, with sales up 9.4 percent while inflation was only 4.4 percent.

The gross margin was unchanged at 25 percent. WHLF will continue to modernise stores and leverage the new Cape Town food distribution centre.

WOOLWORTHS FASHION, BEAUTY AND HOME (WFBH)

This division of the group contributed 21 percent to group sales and 30 percent to operating profit. All categories, except women’s wear, performed in line with the market.

Overall sales marginally declined by 0.2 percent, with inflation of 0.7 percent. The gross margin contracted 1.1 percent to 46.6 percent, impacted by higher markdowns in women’s wear.

Store costs were well contained and other operating costs declined. Going forward the group will focus on fixing women’s wear and growing the beauty business with leading international brands, a strong private label business and online offerings.

Country Road Group (CRG)

CRG is a retail chain offering clothing and homeware products in stand-alone retail stores and concession locations throughout Australia, New Zealand and South Africa.

There are 648 retail and concession store locations in Australia and New Zealand, including the recently acquired Politix. It is also represented in 93 selected WSA store locations throughout South Africa.

CGR contributed 16 percent to group sales and 17 percent to operating profit. Sales rose 5.2 percent, of which online sales were up 28 percent and now accounts for 18 percent of all Australian sales.

The target is to grow to 20 percent by 2020. The gross profit margin improved by 3 percent to 63.7 percent, thanks to lower markdowns and gains from sourcing.

Stores which underperformed were closed and space optimisation resulted in a 3.9 percent decline in space.

David Jones (DJ)

DJ is the oldest department store in Australia and one of the oldest in the world. The iconic department store opened its first store in Sydney in 1838.

It has always been synonymous with style and progress, and offers customers the finest brands across fashion, beauty and home in its 42 stores in Australia and one store in New Zealand.

David Jones contributed 22 percent to Woolworths’ group sales and 19 percent to operating profit.

Sales declined by 3.8 percent, impacted by the challenging trading conditions in the first quarter, compounded by disruptions due to changes in systems and structures.

The second-quarter sales started to improve and online sales growth of 21 percent was achieved.

A new and improved David Jones private label was introduced, and a new merchandise and finance system is likely to assist with better buying and planning decisions.

The target is to have 10 percent of their sales online by 2020, and a new website was recently launched.

The group will continue to focus on space optimisation and aims to reduce space by a further 13 percent by 2020. The food store rollout continues, with two stores opened and more planned in March 2019, as well as a stand-alone store.

Prospects

Trading at a forward P/E of 16 times, the share is trading in line with its long-term average, but might offer value on a relative basis.

The recent earnings disappointments and subdued trading conditions are adequately reflected in the group’s valuation.

However, the valuation remains dependent on a medium-term improvement in margins.

A structural economic recovery could be a tailwind and provide upside to our estimates.

The company has good operating margins and a high return on equity, and its operations are highly cash generative. The retail industry is, however, expected to remain competitive.

Buying Woolworths is recommend for longer-term investors.

The outcome of Woolworths’ venture in Australia is far from certain.

It represents a risk that investors should certainly not take lightly.

Amelia Morgenrood is PSG Wealth regional director.

The views expressed here are not necessarily those of Independent Media.

- BUSINESS REPORT