Woolworths business units retreat as headwinds compound
Multinational retailer Woolworths released its half-year financials, with most business units moving in the wrong direction. Woolworths, like WBHO, has had an expensive foray down under. After purchasing clothing brand David Jones for an astronomical R20bn, the investment has since been the Achilles heel of the group for the last eight years. Woolworths Food, the group's crown jewel, faces headwinds as South African consumers remain under pressure and inflationary burdens are squeezing margins. Of even more concern, Woolworths Food's 'moat' – a competitive advantage that makes the business attractive – is slowly waning. It is evident the likes of Checkers (Shoprite Group) are starting to eat away at market share as it rolls out its higher-end, premium food range. The Australian business unit, along with Country Road and the fashion, beauty and home segments of the business, all remain under pressure. – Justin Rowe-Roberts
Woolworths media statement:
Financial overview
- Turnover -1.0% to R39.2bn
- Turnover and concession sales -2.1% to R42.1bn
- Profit before tax -36.9% to R2.3bn
- Adjusted profit before tax -16.9% to R2.2bn
- Earnings per share -41.9% to 167.9cps
- Headline earnings per share -35.6% to 168.2cps
- Adjusted diluted headline earnings per share -16.3% to 162.2cps
- Net cash (excluding lease liabilities) of R0.3bn (2020: net borrowings of R6.8bn)
- Interim dividend of 80.5cps (2020: Nil)
Commentary on performance
Group turnover and concession sales for the 26 weeks ended 26 December 2021 ('current period' or 'period') decreased by 2.1%, compared to the 26 weeks ended 27 December 2020 ('prior period') and by 0.3% in constant currency terms. Online sales grew by 22.4%, contributing 13.7% to the Group's total turnover and concession sales for the period. Overall trading momentum improved in the last six weeks of the period, with sales growing by 3.0%, and by 3.5% in constant currency terms, supported by more targeted Black Friday promotions, positive festive season trade, and the lifting of lockdown restrictions in Australia.
The results for the current period are not directly comparable to that of the prior period, given the impact of lost sales arising from the prolonged lockdowns in Australia and, to a lesser degree, disruptions in South Africa, coupled with the absence of JobKeeper allowances in Australia and rent relief, which supported the prior period base. The results of the prior period also included the profit on the sale of the Bourke Street Men's property, as well as lease exit and modification gains. Earnings per share ('EPS') was 167.9cps compared to 288.8cps for the prior period, while headline EPS ('HEPS') and adjusted diluted HEPS decreased by 35.6% and 16.3% over the prior period to 168.2cps and 162.2cps, respectively.
The Group ended the period with a strong balance sheet and a net cash position of R258m. Having successfully progressed our capital restructuring in Australia, and as a result of our ongoing cash generation initiatives, David Jones ended the period with a net cash position of A$347m. Given the level of excess cash in this business, the Board of David Jones therefore declared a special dividend to WHL of A$90m (approximately R1bn) after period end, which will, in the interim, be utilised to reduce debt in South Africa.
South Africa
In South Africa, trading conditions earlier in the reporting period were impacted by the ongoing effects of Covid-19, the civil unrest in July, power outages and international supply chain disruptions and supplier delays. International travel restrictions during the key festive season affected inbound tourism and consumption to some degree.
Woolworths fashion, beauty and home
The FBH business grew turnover and concession sales by 4.2% and by 4.7% in comparable stores, with price movement of 5.4%. Growth on the prior period was impacted by the reduced footprint, rationalising brands and SKUs and the timing of summer clearance. The slower trading momentum in the last six weeks of the period was due, in part, to underperformance in selected Womenswear categories. Online sales grew by 19.2%, contributing 4.4% of South African sales, while the ongoing execution of space reduction initiatives reduced the footprint by 6.1%, resulting in improved trading densities.
With a deliberate focus on driving full-price sales, coupled with increased promotional effectiveness, gross profit margin increased by 40bps to 46.3%, notwithstanding inflationary supply chain pressures. Expenses reduced by 0.9%, as we improved operating efficiencies through space reduction and other initiatives. Adjusted operating profit increased by 34.0% to R780 million, resulting in an operating margin of 11.6% for the period.
Woolworths food
The Woolworths Food business grew turnover and concession sales by 3.8% for the half, and by 5.8% in the last six weeks of the period. Sales in comparable stores grew by 2.8%, with price movement of 2.6% and underlying product inflation of 3.7%. Sales growth should be considered in the context of the high Covid-19 base, which benefitted from increased home consumption. Relative to the comparative 2019 period, sales have grown by a cumulative 15.2%. Online sales increased by 55.8%, contributing 3.1% of South African sales, while space grew by 2.2% relative to the prior period.
Gross profit margin of 24.1% was 70bps lower than the prior period, as a result of the high volumes and low waste in the base, continued price investment, and the higher online sales contribution. Expenses grew by 6.3%, due to the ongoing investment in online and digital capabilities and higher energy costs. Adjusted operating profit declined by 8.0% to R1 409 million, returning an operating margin of 7.2% for the period.
Woolworths financial services ('WFS')
The WFS net book grew by 5.3% year-on-year to the end of December 2021, compared to a 7.8% contraction at 31 December 2020, reflecting the recovery in consumer spend. The annualised impairment rate for the six months ended 31 December 2021 improved to 4.0%, compared to 4.1% in the prior period.
Australia and New Zealand
Trade was significantly impacted by government-imposed Covid restrictions across the region, where we were unable to trade in stores representing 70% of our brick-and-mortar sales for over three months during the period. The easing of restrictions and reopening of stores, coupled with pent-up consumer demand, delivered positive sales growth in the last six weeks of the period, notwithstanding the shift of Boxing Day sales into the second half of this financial year versus the first half of the prior period.
David Jones ('DJ')
DJ turnover and concession sales declined by 9.2% and by 9.0% in comparable stores for the half but grew by 3.2% in the last six weeks of the period (7.7% adjusting for the shift in Boxing Day sales). In line with our space optimisation strategy, trading space reduced by a further 5.8% relative to the prior period. Online sales increased by 44.2% and contributed 28.1% to total sales during the period. Gross profit margin increased by 20bps to 35.0%, as a result of reduced markdowns, an improved inventory position, and the timing of the Boxing Day sale. Expenses declined by 1.8% on the prior period, as a result of store closures, space reduction and cost-out initiatives, notwithstanding Covid-related government support and rent concessions in the prior period base. Adjusted operating profit of A$31.0 million was 44.6% down on the prior period, returning an operating margin of 3.2%.
Country Road Group ('CRG')
CRG sales declined by 3.1% and by 3.2% in comparable stores for the half but grew by 1.7% in the last six weeks of the period. Online sales increased by 3.6% and contributed 33.8% to total sales, while trading space reduced by 7.4% relative to the prior period. Gross profit margin of 59.5% was 50bps lower than the prior period, mainly due to increased freight and online fulfilment costs. Expenses for the current period increased by 15.8%, as a result of the Covid-related government support and rent relief benefits in the prior year base. Adjusted operating profit declined by 48.9% to A$48.0 million for the current period, resulting in an operating margin of 9.7%.
Outlook
The South African economy is showing encouraging signs of a post-pandemic recovery. Notwithstanding this, high unemployment, coupled with rising inflation and rising interest rates, are likely to remain a headwind to the outlook for consumer spend.
In Australia, trading conditions are expected to improve post the Omicron peak at the beginning of the second half, as restrictions ease and consumer confidence recovers. Footfall in stores is also expected to improve, albeit that it is likely to remain below pre-Covid levels, particularly in CBD areas. Whilst the prospect of rising interest rates will have some impact, the underlying fundamentals of the economy are sound with record low unemployment, rising wages and a robust housing market.
Global supply chain disruptions and high freight costs continue to pose a risk to both the cost and supply of product.
We remain steadfast and focused on the execution of our strategies and deliberate in our drive for sustainable growth and sound capital management across the Group. We have a strong balance sheet, which provides a solid foundation for future investment for profitable growth.
Dividend Declaration
The Board of Directors of WHL ('Board') has taken a decision to declare an interim gross cash dividend per ordinary share ('dividend') based on a pay-out ratio of 60% of headline earnings of the combined Woolworths South Africa business segments (FBH, Food and WFS).
Notice is hereby given that the Board has declared an interim dividend of 80.5 cents (64.4 cents net of dividend withholding tax) for the 26 weeks ended 26 December 2021. The Company did not declare an interim dividend in the prior period. The dividend has been declared from reserves and therefore does not constitute a distribution of 'contributed tax capital' as defined in the Income Tax Act, 58 of 1962. A dividend withholding tax of 20% will be applicable to all shareholders who are not exempt.
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