Woolworths’ current market valuation does not fully reflect the retailer’s underlying value, according to CEO Roy Bagattini, who said that most of the company’s valuation is attributed to its food business, with limited value assigned to its apparel division.
Speaking to Business Day after the group’s interim results release on Wednesday, Bagattini said improved performance in the nearly R50bn group’s apparel business will be a key driver to future growth value.
“When you look at our overall valuation and our multiples, most of our valuation is reflected in the food business,” he said. Improved performance in the apparel divisions would “move the needle quite significantly” for the group.
In South Africa, the fashion, beauty and home business grew 6.2% over the half year, with Bagattini saying it has now become the fastest-growing apparel business in the country. He said the business grew ahead of the market, both overall and on a like-for-like basis.
In Australia, the Country Road brand returned to growth following what he described as a tough prior year. The group restructured the business, reduced headcount by 25%, changed its operating model and installed new leadership.
Country Road Group sales grew just over 2% in the period, while profit increased by more than 4%. “They’re really coming back into a healthier position,” Bagattini said, adding that he expects the full-year result to be significantly better than last year.
He said the group’s balance sheet remains strong, with gearing within target levels. Woolworths has repurchased more than R4bn worth of shares over the past two-and-a-half years and increased its interim dividend by more than 10% in the period under review.
Bagattini said capital allocation remains focused on investing in the business while maintaining shareholder returns through dividends and share buybacks.
Shares in the group rose 2.63% to R52.64 in afternoon trade on Wednesday, partially offsetting a year-to-date loss of more than 8%, according to Iress data. Over the past year the group’s value has declined by 12%.
It reported a 23% decline in profit before tax for the 26 weeks to end-December 28, even as sales grew.
Bagattini said the comparison between the current and prior performance was affected by the sale of a property in the prior year, which included rental income. Adjusted operating metrics, such as earnings before interest, taxes, depreciation and amortisation (ebitda), and adjusted earnings grew during the current period.
Group turnover and concession sales rose more than 5% to R42.5bn.
Adjusted ebitda increased 3.2% to R4.6bn, while HEPS rose 9.6% to 167.4c.
In South Africa, the food business emerged as a key growth driver for the period, with turnover and concession sales up 7%, boosted by market share gains and volume growth. Online sales through Woolies Dash jumped 23%, with the group saying that it now accounts for 7.2% of food sales.
Net borrowing increased to R5.8bn, though the group said its debt levels remain within target. Cash generation improved, while cash conversion rose to 109.8%.
The group expects an improvement in the overall financial performance for the full year, though global uncertainty and pressure on Australian consumers may continue to weigh on trading conditions.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.