Woolworths' Australian business David Jones, reportedly up for sale, is not the retailer's only problem. Analysts say the JSE-listed group needs to focus on its South African operations, especially the struggling fashion, beauty and home (FBH) business — and jettison the Australian department store.
All Weather Capital fund manager Chris Reddy said this week that Woolworths should concentrate on the operations that are working, including Country Road Group in Australia, and its food business in SA, where it is facing increased competition and input cost inflation.
He said being free of David Jones would allow Woolworths to focus on getting the FBH business “firing on all cylinders” and helping the food business to maintain its strong position.
Reddy said the group’s FBH business in SA was “showing improving signs, which was welcomed by the market”.
He added that it was “positive to see the higher percentage of full price items sold, coupled with the focus on reducing the footprint in less profitable stores” and that this had helped improve trading densities and margins.
Right from the beginning we thought the David Jones transaction didn’t make sense for Woolworths
— Richard Cheesman, Protea Capital Management analyst
Protea Capital Management analyst Richard Cheesman said the turnaround at FBH had been getting “mixed reviews” but he believed Woolworths could get back on track if it got the basics right, such as good quality staples.
“Woolworths pivoted towards fast fashion and it ended up not doing the basics right. The Woolies customer was looking for quality essential garments and became somewhat alienated. Pricing strategies also did not help.”
Woolworths said in response to questions that it is working hard on turning around its fashion business in SA.
“The underperformance of our fashion business has historically resided both in strategy and execution. Simply put, we took our eye off the customer, and, as a result, over- proliferated both in labels and products, which lacked relevance.”
The group said it was building its “digital and data analytics capabilities” and was leveraging the “insights from customer and market data to redefine the role Woolworths as a clothing brand plays in the apparel market in SA”.
It said it was “driving a more focused approach” as a retailer that offered “superior-quality, predominantly private-label product” for the whole family.
“Our customers will see this in the consolidation of product and brands, with a growing emphasis on our categories of wardrobe essentials, denim, athleisure, work-leisure, kids and baby.”
Turning around the fashion business represented the “single biggest opportunity to reset the value of the group” and the immediate priority was to restore the “underlying financial health of our FBH business”.
“Central to this is our approach of driving quality over quantity, through increasing full-priced sales, lowering markdown and improving trading densities.”
Woolworths said it was encouraged by the progress made, with overall sales in its FBH business growing 4% for the six months to December 2021, with full-price sales growing 8% and “profit per square metre by over 40%”.
Woolworths declined to comment on speculation that David Jones was up for sale. It did say that it remained “focused on the operational turnaround of David Jones and ensuring that this iconic business is restored to its rightful market leadership position in Australia”.
David Jones, which Woolworths bought in 2014, has been a major drain on the group, which had to impair it in 2017 and 2019 for a total R12bn of the R21.4bn it paid for it. Woolworths has now slashed the debt associated with David Jones and sold properties in Australia to stabilise the balance sheet there.
Adrian Saville, investment specialist at Genera Capital, said it would be a good idea for Woolworths to sell David Jones as the acquisition had been a “very poor allocation of capital”. Woolworths had “gone into a market where they underestimated the competitive landscape and had acquired a business whose model has lost traction”.
Saville said the lesson from Woolworths’ Australian experience was that when “businesses move into new markets, it’s absolutely critical they have a solid understanding of what it is they are acquiring”.
The experience was likely to make Woolworths “fairly gun shy” and focused on entrenching their “established South African position, where they have historically been very competitive, and they remain competitive”.
Cheesman said that “right from the beginning we thought the David Jones transaction didn’t make sense for Woolworths” and that it has “probably worked out worse than we feared it would”.
He said that when South African companies operate from a strong home base and grow into peripheral markets they tend to get better returns.
While Country Road has been a better business for Woolworths in Australia, he believes a “great transaction” would see the group “exit Australia” entirely and focus on its core South African business and returning cash to shareholders.
“That would be a very good outcome,” he said.
