Woolworths FY results – Space, margin and what’s in David Jones’ locker?

By Shaun Murison

Woolworths Holdings is set to release full year results on 28 August 2014. The current period to be reported upon is a 52 weeks, 1 week less than the previous reporting period of 53 weeks.

Guidance issued via a trading statement shows steady growth over what has been a difficult trading environment for fellow retailers as local consumers are heavily indebted and remain under pressure. The company has perhaps proven a better resilience to its sector counterparts due to its middle to upper LSM focus.

Clothing sales (South Africa) and merchandise sales (including the rest of Africa) have increased by 8.4% and 5.1% respectively. Together these divisions account for just over 30% of turnover and more than 50% of the group's profit before tax.

Food sales have experienced better growth (12.7%) than the aforementioned, but although accounting for nearly half of turnover historically, operate on thinner margins than clothing and merchandise, equating to around 28% of the company's profit before tax.

Country Road, which provides Woolworths' retail access to predominantly Australia and New Zealand geographies, has shown the most substantial growth for the group at 20.3% for the full year, growth was boosted by the inclusion of the Witchery Group. Country Road accounts for around 18% of turnover and 16% of profit before tax.

Woolworths Financial Services (WFS) has grown the debtor's book by 10.8% although impairments have increased to 4.8% from 3% previously (including collection costs). WFS accounts for around 5% of profit before tax.

With total group sales increase of 12.7% (14.4% vs 52 week comparative) turnover is expected to be R39.7bn for the full year, while earnings per share are forecast to be in the region of R4.04 and a final dividend is estimated at R2.87. Investors will be waiting to see whether the company has continued to improve on the high margin clothing and merchandise businesses which have been benefitting in the past from better price sourcing of apparel. The lower margin food business is reliant on increased volume and the outlook for future retail space gains will be of importance for long term growth. In the last few months Woolworths has had its takeover bid for another Australian retailer, David Jones, approved by an Australian court. David Jones is one of the oldest retailers in Australia offering a similar product line to Woolworths, targeting a high end consumer in clothing, apparel and food, although further offering a broader product line in terms of electrical goods, toys, homeware etc. Investors will also be anticipating further guidance relating to the integration of the new subsidiary with Woolworths' current business model and opportunities that arise from the large acquisition. The David Jones purchase will add around 38 new stores (as well as an online store) to the Woolworths portfolio and around $100m profit after tax to full year results moving forward.

A Thompsons Reuters poll of 15 analysts have an average rating of buy on Woolworths Holdings, with no sell recommendations.

This article was originally published on IG.com