Analysis: Woolworths gets it right, Ian Moir leads retail pack with 47% ROE

Shaun Murison, an analyst at IG has had a keen focus on Woolworth's in the run-up to the group releasing its full-year earnings results this morning. He joined Alec on the CNBC Power Lunch to analyse the numbers. Woolies reported a 10% increase in profits for the year, and a a 14.4% increase in sales, the results fell marginally short of analysts expectations given a tough consumer environment in South Africa, as well Woolies' venture into the notoriously tough Australian market with its purchase of high-end Australian retailer, David Jones. Despite Woolies' diluted headline earnings per share being 29 cents lower than expectations it has still fared far better than lower-end retailers, and has seen its share price increase by a third over the year which was matched by today's positive trade. One thing that is for certain is that Ian Moir's guidance of Woolies is proving to deliver far more in terms of returns and results than most of its competitors. I'm sure we are all just as eager to see what is going to come out of Woolies' move to Australia – everyone seems to agree that it's a safe bet at the moment.  – LF 

ALEC HOGG: Shaun Murison is Market Analyst at IG and he joins us now on the line. Shaun, you've been doing quite a lot of work on Woolworths: ahead of the results and no doubt, having a look at them now. The 47 percent return on equity number is the one that keeps jumping out at me. I feel like a bit of a stuck record here, but from a global perspective, those numbers are way out line with other retailers and yet they seem to be able to keep it going.

SHAUN MURISON: Look, Woolworths is succeeding where many of the other retailers in South Africa are failing. They're growing all aspects of their business. They're growing the food side. We focused on the margins on the food side – they're increasing that retail space quite successfully. Country Road is growing. They're increasing their space. The acquisition of the Witchery Group has proven to be a successful acquisition and even locally, under a pressured consumer, Woolworths is definitely benefitting from catering toward that higher LSM group. When we compare Woolworths' results to the other retailers that have come out (Massmart, for example), they're streaks ahead.

ALEC HOGG: What is Woolworths doing right, that Massmart is doing wrong?

SHAUN MURISON: Firstly, they catering to a different LSM, which is impacted less by constrained consumers. They are growing through acquisition. They're expanding into markets like Australia and they're making the right acquisitions. Sometimes, we think these acquisitions are expensive, as I read in the previous commentary (and that was the initial reaction to the share price. When we saw the David Jones acquisition announced initially, we saw a significant drop in the share price, but as the market's start to digest it, to realise that there are quite good synergies between these different business models and different businesses.

ALEC HOGG: But it does appear as though the investment analyst people (like yourself) really like Ian Moir. Is he in a different league to his competitors: Whitey Basson, the new CEO Richard Brasher at Pick n Pay, and the man we saw just a moment ago – Guy Haywood? Is he that much better?

SHAUN MURISON: I don't want to comment on that, but he's doing a good job, growing headline earnings at 17 percent when other retailers are struggling to see any growth. One percent growth here, three percent growth there, and a decline in headline earnings by 25 percent… Yes, he's maintaining margins, maintaining cost, expanding, and creating a company that is now one of the biggest retailers in the Southern Hemisphere.

ALEC HOGG: Yes, he certainly is putting the numbers on the scoreboard at the moment, but you just have to question the move to Australia rather than the move into other parts of Africa, where it seems like the whole world is going. Woolies out of Nigeria: that doesn't seem to have affected the perception of the company, though.

SHAUN MURISON: The acquisition and the movement to Australia have been quite successful, especially the Witchery Group. The Country Road purchase of Witchery Group added 280 stores and more floor space. It's a significant contributor to the earnings now. It's growing. When we have a slowing consumer in South Africa; through Australia, the consumer health is much better. They are achieving growth through their acquisitions. If you look at something like David Jones, going forward, you gain a little bit of confidence if you look at how successful the Witchery Group has been.

ALEC HOGG: Shaun Murison is Market Analyst at IG, giving us an upbeat view on Woolworths. He, Sasha Naryshkine, and indeed, all 15 of the Thompson Reuters surveyed analysts believe that Woolworths is a company that you should be buying the shares on. I suppose that sometimes one feels that you're in a lonely place, to be an exception against all of that lot, but we'll see. Time will tell.

Thanks for being with us today. We had a very interesting program. I think I'll be going and doing a little bit more work on Massmart, and also, perhaps a little bit more concern over what Guy Hayward had to say.