Woolworths is fighting many battles

Being recession-proof and resilient during uncertain times was once Woolworths’ hallmark, which earned it the status of a darling in SA’s retail sector.

Woolworths is now facing many battles: an intensified war with its competitors via aggressive promotions for market share, SA’s ailing economy and the problem of burning cash as a result of the slow turnaround of its Australian business David Jones.

“We are in the midst of a storm of change. The customer is changing and markets are in tough places.  But we are not going to wither and die,” Woolworths’ CEO Ian Moir told Moneyweb.

Although Woolworths’ group sales grew by a marginal 3% to R74.3 billion for the year to June 2017, its clothing business underscored the extent of heightened markdowns by its peers in response to low consumer confidence and spending.

Clothing sales advanced by 1.4% and fell by 0.9% on a like-for-like (same stores) basis. Excluding price inflation of 6.6%, sales volumes fell by 5.2%. Gross profit margins – a key metric used in the retail sector to measure profitability – declined to 47.9% from 48.3% in 2016.

Moir sees little hope of the clothing segment turning its fortunes around for a while. “Margins will tread down for a long period of time. The next two to three years are going to be tough.”

Woolworths expects clothing margins to grow by 16% to 17% for its full-year 2020.

The recovery hinges on retail basics: a better customer shopping experience and fast response to fashion.  On the latter, 80% of its clothing business is ladies wear, and the retailer’s lead time on introducing new fashion is six to eight weeks vs 11 months five-years ago.

Woolworths joins its peers Truworths and The Foschini Group in offering a sober outlook for the apparel segment.

“I get the sense that these retailers have been hit more by structural changes such as competition and promotional activity changes than cyclical changes like economic growth and low consumer confidence. Woolworths in its results has come short more on structural changes,” said Alec Abraham, a senior analyst at Sasfin Securities.

The food segment, a mainstay for Woolworths, is the antithesis.

Retail space grew by 4.6%, helping to lift food sales by 8.6% and like-for-like sales by 4.6%. Factoring Woolworths’ price inflation of 8.4%, sales volumes grew by a meagre 0.2% compared with a resilient 2.1% posted by its closest rival Shoprite (SA supermarket sales of 8% and product inflation of 5.9%).

On Tuesday, Shoprite CEO Pieter Engelbrecht unveiled the retailer’s plans to ramp up its exposure to higher-income consumers – a market traditionally conquered by Woolworths.

Moir is unfazed, saying Woolworths doesn’t have a monopoly in SA’s premium food space, as Engelbrecht implied. “They [Checkers] have more LSM nine to ten customers than we do, so does Pick n Pay. We just do premium really well,” Moir said.  “People have tried to attack our business for a very long time. We are deeply entrenched in quality and value. We have great product developers and technology. It’s a difficult business to be in and we are far from being complacent.”

Arguably, the top priority for Woolworths is turning around its disappointing David Jones business. Since Woolworths completed its ambitious R22 billion acquisition of David Jones and sister retailer Country Road Group (CRG) in 2014 – tipped to turn it into a substantial retailer in the southern hemisphere – both businesses have been in turnaround mode.

Woolworths has sunk about A$284 million (R2.9 billion) between 2016 and 2017 to reposition David Jones and CRG by mainly replacing merchandise and financial systems that track stock availability better.

Woolworths’ push of its home-grown private label brands including Studio W and RE into David Jones stores flopped as the quality and fashionability of merchandise didn’t resonate with Australian shoppers. It will relaunch private label brands in March designed by its local CRG, making the price points affordable and fashion-led.

Its turnaround efforts are starting to bear fruit at CRG, which grew sales by 5.1% while comparable sales fell by 0.4%. David Jones is still the problem child, with total sales up by 1% and a decline of comparable sales by 0.7%. “The CRG performance is encouraging and indicates the new management team [led by ex-Marks and Spencer executive Scott Fyfe since this year] is fixing the business but it still has a long way to go,” said Damon Buss, an equity analyst at Electus Fund Managers.

Woolworths recently introduced a high-end food service into David Jones, opening a flagship Foodhall in Bondi Junction, located in an upmarket eastern suburb of Sydney. The store is similar to Woolworths’ model of offering food and apparel in its SA stores.

Abraham said Moir has successfully converted Woolworths’ brand equity into shareholder value. “I’m confident that he will do the same with David Jones.”

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