Woolworths has had a big week. Not only did the group release a trading update, reporting a 14% increase in sales, it was also the given the go-ahead by the Federal Court in Australia to forge ahead with its R20bn acquisition of David Jones, an upmarket retailer native to Australia. Alec was joined in the CNBC studio by Matthew Warren from First Avenue Investments to have a look at what the go-ahead means for Woolies practically, the risks and opportunities that group faces and how the markets have interpreted the news. – LF
ALEC HOGG: Woolworths reported a 14 percent increase in full-year sales, while the Federal Court has approved the retailer’s bid for David Jones. Matthew Warren, Head of Financial & Retailers at First Avenue, is over at our Stella Road studios. Matthew, it’s good to have you on the program as always, and thanks for giving us a little update on this. The Woolies share price came off a little today on that news that they finally got the go-ahead. What’s it telling us?
MATTHEW WARREN: If you look at the sales growth, it’s pretty good – 14 percent. Fifty-two weeks. On 52 weeks, good store growth. There’s a lot of inflation push coming through, which is not unexpected. It’s a delayed reaction to the Rand weakening, but the sales look good in Country Road Group. They look good in food in South Africa. There’s just a bit of weakness in the private clothing label here in South Africa, which really speaks to the environment. The low and middle consumer is struggling right now.
ALEC HOGG: The share price is up 24 percent in the last year. The consumers are struggling, as you say. They’ve got this huge risk, no matter how you want to cut and slice it, with David Jones in Australia. What are investors expecting from Woolworths? It seems to be priced for perfection.
MATTHEW WARREN: Yes, we’re shareholders in Woolies and we like the company quite a bit. In our view, the valuation is right in the realm of fair value. I think what you see is that the David Jones deal is a large deal and we like it. They’re going to go over there and buy the highest end department store. It’s really been under-managed, so the concession areas in the store have been well done by those global brands, but in the parts of the floor that they control, it’s very much sub-optimal. Woolies are better retailers. They’re going to go and clean it up. They’re going to improve the merchandising. They’re going to better utilise the real estate. They’re going to get more exposure of the Country Road brands into the David Jones stores and they’re going to introduce Woolies’ private label here in South Africa, to David Jones at better price points/better margins as well. There’s quite a bit of leverage to pull there to improve the profitability of David Jones.
ALEC HOGG: I guess in a way, they’ve bought a distribution chain for products that they’re already selling very successfully in the South African stores.
MATTHEW WARREN: Yes, and they’ve already done that successfully. Woolworths South Africa bought into the Country Road group and clearly, that group needed a lot of improvement, which they did. However, Woolies in South Africa is a platform for the Country Road Group brands to grow, to experiment on the margin, and make things better, expand into new categories, and really harvest the footfall within Woolworths. Now they can go and do the same thing at David Jones. There’s a lot of footfall in David Jones. It’s a very high end, affluent customer. Similar Country Road brands are in there, but brands such as Trenery are not even in there, so now you’re going to introduce Trenery, which matches the demographic of the shopper quite well and harvests that opportunity. That’s just one among many.
ALEC HOGG: It sounds like a really good and pretty compelling story, but what’s the risk in all of this?
MATTHEW WARREN: I would say it’s in the execution. Clearly, there’s a lot to get done. They’ve given themselves three to five years in guidance, in terms of reaping the AUD130m in synergies. I think a lot of that will be put in place within the first two years and the numbers will start to come through. Aside from that, it’s the normal risk. It’s risk to the Australian macro economy. They’re commodity and China-dependant, much like we are, so I don’t know that that’s very different from what Woolies already faces. It’s a slower growing environment and more competitive there. I think the writing on the wall that Woolies admits to – and I think not every shareholder here in South Africa has admitted to – is that retail in South Africa is also going to become more competitive, so rather than letting it happen to you, you really need to be proactive. Go out there and do what you need to do to be one of the winners in South African retail as it becomes more competitive.
ALEC HOGG: Well, that’s bringing us up to date on today’s news that the deal in Australia for Woolworths – R20bn acquisition – is going ahead. Matthew Warren is the Head of Financial & Retailers at First Avenue.
