The Woolworths share price has recently hit an almost two-year low after the retailer came out with poor interim figures. Investors are also unsure of where this former retailing icon is going in terms of growth, either acquisitive or organic.
The foods division, which has always been the mainstay of the business, is taking increasing strain from Checkers, which is in the Shoprite group. What appears to be lacking in Woolworths’ makeup now is a sense of direction. Having eventually disposed of its David Jones department store business in Australia in 2023, the group now needs to demonstrate that it has the wherewithal to move to the next level locally — and there are precious few, if any, signs that this is happening.
For the 26 weeks ended December 24 2023, Woolworths group turnover grew 5.1% to R37.5bn, based on continuing operations. If the David Jones business is included in the previous interim comparative, then turnover declined 16.7%. Pretax profit fell by 14.1% to R2.5bn and headline earnings per share (HEPS) fell by 7.5% to 203.3c. The interim dividend per share was reduced by 6.6% to 148c.
Woolworths Foods contributed 61.1% of the turnover, while fashion, beauty and home contributed 19.9% and Country Road of Australia contributed 19%. So once again, the foods division was not only the biggest single contributor but also the most dependable. Turnover and concession sales in the foods division grew by 8.4% and by 7.2% on a comparable basis. This is a very strong performance relative to all other listed food retailers, including even Shoprite. The company continued to cut prices and this was reflected in the internal rate of inflation, at 9.1%, being somewhat lower than turnover. Online food sales grew by almost 50%, aided by the on-demand Dash home delivery app.
Fashion, beauty and home, the clothing and homeware division, had another poor interim. While much of this poor performance was due to extraneous factors such as heightened port congestion resulting in certain items not being available, there is no escaping the fact that this division has been volatile for many years. Turnover and concession sales grew only 2.2%, with comparable growth even less at 1.5%. Adjusted operating profit decreased by 5.3% and operating profit margin fell from 13.1% to 12.2%.
Country Road sales declined by 5% and by 9.5% on a comparable basis, reflecting the poor ambient economy in Australia, where consumer sentiment is at near historical lows. Operating profit margin almost halved, from 15% to 8.5%.
There is little, if any, relief in prospects for the second half, with interest rates in SA likely to remain at present levels until at least the third quarter. Port congestion is likely to remain a factor for the foreseeable future and there appears to be no end in sight to load-shedding.
The group has acquired 93.5% of Absolute Pets and the deal is expected to be consummated by the end of the current financial year. This is a small deal and won’t affect the group materially.
When Woolworths bought David Jones in 2014, it was an act of faith, a gamble, which, had it succeeded, should have put Woolworths onto a new and sustained growth path. But it turned out to be disastrous, and Woolworths eventually managed to limp away, having taken a huge impairment. It bought Country Road in 1999 and this has not been a great performer either, though nowhere near as catastrophic as David Jones. But it appears that current Woolworths management is intent on persevering with Country Road.
The one area of the business that has never disappointed is Foods. And while it is experiencing sustained competition from Checkers, it remains the leader in the field of providing quality products. Much of that advantage lies in Woolworths’ undoubted leadership in cold chain, but eventually Checkers is likely to catch up here as well. Meantime, Checkers is chipping away at Woolworths Foods in other areas, especially in the home delivery space, where it appears to be the leader with its Sixty60 app.
• Gilmour is an investment analyst.
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