Woolworths reported its highest-ever interim headline earnings in the six months to December 25 after turning around its fashion business in SA and after a major improvement in sales in Australia as lockdowns ended.
The record was achieved even as sales of food in same stores in its star SA business declined.
The group returned cash to shareholders by buying R1.5bn of shares in the period. Fewer shares in circulation improved its financial metrics.
Woolworths was able to increase headline earnings per share, a main profit measure in SA, by just more than 75% to R2.94bn. It paid an interim dividend of R1.58 per share, up 97%.
Its food business, however, is under increasing pressure as consumers are constrained and rivals such as Checkers begin to sell high-end products. Its like-for-like store food sales rose 5.4% with prices up 6.8%, meaning it sold lower volumes in same stores. Overall, it grew food sales, including at new stores, by 7.6%.
But group CEO Roy Bagattini says the company is not a mainstream retailer and offers value for what people pay, being a premium food business. “It’s really important to understand that we’re not Checkers,” he told Business Day.
He said load-shedding has increased the number of consumers returning to Woolworths as its fruit and vegetable quality are superior to rivals’ goods thanks to years of investment in its cold chain.
“We’re not playing the Checkers game. We have a fundamentally different proposition. We have what I call the holy grail of food retailing.”
He said its food business had found the “sweet spot” between delivering “the best offering including the best product, experience, innovation [and] convenience to the customer, [while] offering high returns to the shareholder”.
It also has the best return on capital employed, which is more than two times its peer group, he said. “No one comes close to the best proposition for the customer and the best proposition for shareholders.”
The company is also spending money to keep food prices lower than its own store inflation of 8.4%.
Sasfin analyst Alec Abraham said he was “surprised that the food division has been recording negative volume growth despite the group’s investment in price and continued dedication to quality. This combination of factors, certainly in my mind, makes Woolworths Food business a compelling value offering.”
The cost of load-shedding for the group, including food waste, meant operating margins in the food business dropped from 7.2% to 6.7%, which is still high by global standards. It lost R90m in operating profits in the half due to load-shedding. Almost all its food stores have generators.
Woolworths was blunt about power cuts being here to stay and is working to support food suppliers in their energy challenges. “In SA, an imminent resolution to the debilitating power crisis and stimulus for economic growth appears remote,” it said in a statement.
Under Bagattini, who joined Woolworths in 2020 and has a clothing background at Levi’s, the retailer has been working to turn around its fashion, beauty and home business by reducing the products on offer as well as cutting extra store space.
While it did not really grow the volume of clothing sold, its sales were up 11.2%, and prices up 10.8%, meaning it is not relying on as many promotions to sell clothing.
“Our product is resonating a lot more. It’s coming to life. It translates into better full-price sales and consequently lower markdowns, and that drives the profitability very handsomely.”
He said the turnaround in clothing is about “halfway” there, but the company still needs to improve product availability and ensure the correct sizing is always available.
Bagattini said the success with fashion will continue despite pressure on consumers, and Woolworths plans to double its beauty (make-up and skin-care) business revenue in three years. “We are absolutely confident that our trajectory will continue. We’re moving in the right direction.”
He said Woolworths was focusing on the financial health of the fashion and home business and “not just chasing market share indiscriminately”.
Abraham said: “With fashion, beauty and home being the highest margin generator, I believe fixing that business will make an enormous difference to bottom-line profits.” His expectation when Bagattini took over as CEO was that the fashion business’s profitability would recover faster than its sales — “and we’re seeing exactly that”.
Woolworths has not yet announced a deal price for the sale of the Australian department store David Jones, which is set to be completed by March 27, but Bloomberg reported it is thought to be about R1.6bn, a far cry from the R21bn paid for the store in 2014. Still, the sale is being welcomed widely.
When asked by investors at the end of a webcast what the figure would be, Bagattini declined to give one. “The net proceeds that we will realise, which includes a fair amount of cash, will only be finalised on legal completion. So when we close our accounts and wrap up the transaction, we will be sharing all the relevant information with the market.”
Woolworths shares closed 3.23% lower at R74.51.
Updated: March 01 2023
This article has been updated with additional information
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