Having turned around its fashion division, cut debt and sold the struggling David Jones business, Woolworths plans to expand its clothing chain by opening much smaller stores in townships where it is not represented.
About 20 shops are planned for this financial year as Woolworths moves from fixing the business to growing it.
The 10 existing stores, which include ones in Gugulethu, Thembisa and Giyani, should eventually be increased to about 100 in the medium term, said CEO Roy Bagattini.
Expansion into the township market through the opening of smaller stores is a growing trend among retailers and restaurateurs as they seek to access the untapped spending potential of the informal economy.
The Spur restaurant group is planning to open Panarottis and RocoMamas outlets in smaller formats, making it easier to find new locations. Hardware retailer Cashbuild is considering a similar move.
The 300m² Woolworths fashion shops are almost 10 times smaller than the traditional 2,000m² stores in shopping malls.
The stock range in smaller stores is limited but “it’s got a unique proposition in terms of product offering. The people that work in those stores also are really skilled at styling and selling,” Bagattini said.
Speaking at the retailer’s financial year end results presentation, Bagattini said that in contrast to traditional stores that are typically self-help outlets, the smaller stores would have more involved customer service employees encouraging customers to try on clothing.
The smaller outlets would have shorter leases, and because of the limited stock on offer it would be easier to replace items that do not sell.
In the financial year end to June 25, Woolworths grew profit before tax by almost a third and increased its dividend 36.4% to R3.13 a share as its turnaround strategy takes hold.
Profit before tax spiked 29.5% to R6.7bn and adjusted diluted headline earnings per share, a common profit measure in SA, rose 35.6% to R5.08.
When Bagattini took over in 2020, he promised to assess and fix the non-performing parts of Woolworths, especially the loss-making David Jones and the underperforming fashion business. Debt has been reduced by R9bn and the Australian department store sold for R1.1bn after finally showing a profit.
David Jones, which was bought for more than R21bn in 2014, lost the group more than R14bn and took management time away from the SA business and the better-performing Country Road clothing group in Australia.
Momentum
Bagattini said the retailer has achieved what he promised when he initiated the turnaround strategy three years ago: “What we said we would do, we have done.”
Woolworths now has the cash and momentum to grow the business.
“We have structurally repositioned our group,” he said. “We can now use these levers [and] this firepower to our advantage to grow our business and generate greater levels of economic profit.”
Bagattini also promised to fix the SA clothing business, which frequently had to flog goods on sale. Woolworths reduced the number of ranges and the amount of female formal wear on offer and focused on what it calls six must-win categories, which include denim, underwear and children’s wear.
It has added external brands such as Levi jeans, a company where Bagattini once held a senior position.
Full-price clothing sales have grown from above 70% of sales to 80% in line with the strategy.
In the year to June 25, clothing prices rose on average 11.6% and sales in same stores grew 8.3%. This means that despite the healthy performance, Woolworths sold fewer items than the year before.
Its food business boasted an operating profit margin of 6.9%, which is higher than other grocers in SA and many globally.
It is focusing on attracting greater spending from customers who do their primary shopping elsewhere.
Bagattini explained that 90% of its customers shop at other grocery stores but buy some goods from Woolworths. If the retailer can increase this spend by 1%, it will grow revenue by more than R1bn.
Dash delivery
Prices in the food division grew 8.3%, below underlying product inflation of 9.9%, as Woolworths tried to attract customers.
Its Dash delivery service, which lagged behind competitors as it added cold chain fridges to scooters, is close to breaking even.
In the year, the group spent R2.9bn buying back 6.6% of shares in issue, a move that can drive up the share price and increase value for shareholders.
The share price closed 1.51% lower at R75.44 on Wednesday on the JSE.
Updated: June 30 2023
This article has been updated with additional information.
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