Ian Moir, CEO of Woolworths, is jaw-droppingly energetic. Analysts got another demonstration of the now-familiar energy and optimism that has characterised Moir’s 21 years with Woolworths (he has been CEO for nine of those) at last week’s half-year results presentation, as he lightly reeled off the challenges facing the group, as well as the many signs they were now on the right track.
"Our clothing business is coming back … we’re doing the right thing, taking the right approach; the new executives understand the market," he said.
As for Australia, where the market is "really tough", Moir told analysts: "David Jones performed well, right up to the end of November." He enthusiastically reminded everyone present that "we’re building a business that’s future-fit".
It was all chillingly reminiscent of comments he made after dire results in September 2017: "… we can fix this, we can get it right and we can get back to what we said we were going to deliver ... "
With Moir’s default setting at "upbeat", he even manages to make cutting a dividend sound like a rollicking good idea. "We’re stopping the dividend flow from Australia over the next couple of years so we can reduce the debt in Australia."
That would be the sort of message delivered with trepidation by many CEOs; but the Scottish-born Moir has a way of making it sound like part of an exciting growth plan.
At times during Moir’s presentation, it was easy to forget that Woolworths, which was founded by Max Sonnenberg in 1931 in Cape Town and now operates in 14 countries, is a retailer facing an existential crisis.
The reality is the Australian business, consisting of David Jones and Country Road, which contributes nearly half the group’s total operating profit, is in precarious territory. At stake are not just huge whacks of shareholder value and Moir’s reputation, but also the legacy of the chair, Simon Susman.
Susman, who has been with the group 37 years and is due to retire from the board in November, runs the risk of being remembered for backing the controversial Australian acquisition that cost so much money and not for building a world-class retail brand with exceptional values.
That deal, which risks unravelling all that Woolworths has built in recent decades, was announced in April 2014.
Moir said that Woolworths would pay R21.4bn to buy David Jones (or DJs), one of Australia’s most prominent department stores. It had 38 branches and sold everything from wine to gourmet food, clothing and beauty products.
It was a deal that "took SA to Australia", he said at the time. "The department store isn’t dead — mediocrity is dead. In short, we’re buying this business to build a bigger southern hemisphere brand."
Then it all started to go wrong. Even 18 months ago Moir’s evangelical pitch may have had a longer-lasting impact since, at that stage grim news, even a shocking R7bn write-off, was still a relative novelty for Woolworths shareholders and analysts.
Even a year ago, despite the R7bn write-off on David Jones, it had been relatively easy to drink the Moir Kool-Aid.
But last week the analysts and investors in Cape Town seemed far more jaded, less seduced by the promise.
"Apart from the dividend cut there wasn’t much in the results that surprised me," said Sasfin analyst Alec Abraham, "What did surprise me was the tepid questioning by analysts; there was much more aggression at the last results presentation."
And there was plenty to tackle Moir on this time. For example, will the "future-fit" building process at David Jones be completed in time to avoid another hefty write-down? Do the clothing executives in SA and Australia understand the market well enough to avoid being hugely overstocked — not only in the wrong products but in the wrong sizes, as they had in the past?
The cold numbers themselves didn’t suggest an upbeat soundtrack. Overall, operating profit fell 9.2% to R2.78bn.
Digging deeper, David Jones’ operating profit for the six months fell 30% to R471m, while Country Road’s operating profit inched up 2.6% to R626m. At home, Woolworths’ fashion, beauty and home division’s profits fell 11.8% to R915m. Even its food division grew just 0.6%, to R1.07bn.
Analysts recalled Moir’s promise 2½ years ago that the costly investment in systems, processes and skills would ensure the group was "in a much stronger position over the next three years". But if you keep saying that, and it only goes the other way, when do people stop listening?
There’s no doubt Moir’s optimism and energy played a vital part in Woolworths’ growth from a comparatively modest and predominantly SA-based retailer to a heavyweight southern hemisphere retail operator. If you look over the longer term since his appointment as CEO in 2010, Moir has overseen turnover tripling to R70.6bn from R23.7bn, and operating profit surging to R5.2bn from R1.6bn.
In fact, part of the reason he was appointed CEO was that he had corralled his energy and optimism into sorting out another Woolworths acquisition in Australia that had fallen on tough times — Country Road — which it bought in 1998. The year before he was appointed Woolworths CEO, Moir was able to claim a 21.2% surge in Country Road’s turnover, which reached R2.3bn.
This no doubt earned him the undying support of Susman, whose family has played a formative role in Woolworths’ 89-year history, and who — for years — had ignored analysts’ pressure to sell off the underperforming Country Road business.
The problem is, with each presentation, Moir runs the risk of sounding less like a corporate white knight come to save Woolworths, and more like Monty Python’s delusional Black Knight who dismissed the severing of all his limbs by Sir Arthur with a "’tis but a scratch … I’m invincible".
It’s a not uncommon problem in management: what is deemed energy and optimism during a period of success is recast as dogged stubbornness in a period of crisis.
Industry insiders say Moir refuses to listen to advice and seems not to realise the extent of the problems in Australia. "Ian’s not facing up to realities, it’s crazy what’s going on … he doesn’t listen to people," said one retail consultant, who recently returned from Australia.
Some analysts worry that Susman is no longer willing or able to act as a foil. Asief Mohamed of Aeon Investment Management says his big concern is that Moir is so determined to fix David Jones that "he and the Susman-led board may be blind to the fact it might not be fixable". Which makes it remarkable that more attention wasn’t paid to the format of the latest results presentation — Susman opted to sit quietly in the audience among the analysts while chairman-elect Hubert Brody made some controversial introductory remarks.
During the 1970s, Kremlinologists in the West would pore over pictures of the occasional public outings of the Soviet Union’s top brass for indications of shifts in power within the Communist Party. They would look to see who was standing closest to — or furthest from — Nikolai Podgorny, chair of the presidium of the Supreme Soviet, to determine who was in favour and who was on the way out.
So what would the corporate Kremlinologists make of the fact that this time, Susman’s role was played by deputy chair Brody, who describes himself rather self-deprecatingly as "a bit dry"?
It’s true that Brody doesn’t have the flair of Susman or Moir, but given the current surfeit of flair, his quiet determination may be exactly what Woolworths needs.
For the past two years, as Mohamed points out, shareholders have worried that Susman was too close to Moir to be able to make the sort of clinical decisions needed. So was this an indication that the board was keen to demonstrate a desire to split the Susman-Moir axis and hence some willingness to challenge Moir? Or was Susman just fed up with answering the inevitable questions on David Jones? Or was it a practice run for Brody, who takes over as chair after the November AGM?
Not that Brody’s first public outing on behalf of Woolworths went down well. Analysts had hoped the company would shed light on the dramatic departures of the two Australian-based nonexecutive independent directors, Gail Kelly and Patrick Allaway.
Brody wasn’t game. "We’re not going to provide detail or reasons on why they left or on any of the board deliberations that took place around [the departures]. Quite obviously it is not good; it’s an issue the board and I are taking very seriously."
He added that it was not a reflection on the numbers or the group’s integrity.
But Brody’s response was poor, given that Kelly and Allaway’s departure had fuelled speculation that there is a fundamental boardroom disagreement about what to do about David Jones.
More troubling, from a governance perspective, is that a strong balanced board should be able to accommodate disagreement — in fact, should encourage it. So, Kelly and Allaway’s departure not only leaves the board weaker but raises concerns about the balance of power at a critical time in Woolworths’ history — a time when it is faced with existential options.
In fact, the absence of any detail makes Mohamed fear there may be further write-offs in the wings.
At this point, it seems Woolworths has only a few options: sell David Jones as it is; sell it after completing a planned investment programme to upgrade the chain; or hold onto it and get it right.
So how did it happen that just nine months before he is due to step down from a company that’s been part of his life, Susman is now facing a legacy-destroying value wipe-out at Woolworths? Especially since his father was a key player in the group’s formative years.
Looked at in retrospect, the story of the past 10 years reeks of hubris and greed. But it has to be said that like energy and optimism, hubris and greed play an important role in corporate growth — just as they play a major role in corporate destruction.
While it may not appear tangible in any governance code, the key function of a board should be to manage these executive instincts to ensure there is more growth than destruction — value creation without too much collateral damage.
In hindsight, it seems evident that successive Woolworths boards, not just the current depleted one, failed in this regard. And right now it’s difficult not to see Susman’s Xi Jinping-style appointment as honorary president as part of this unhappy trend.
For one institutional shareholder who looked on as the share price slumped from over R100 in 2015 to half that value today, Susman’s honorary appointment was the final straw. "When I saw that I dumped the rest of my shares," he says.
But that perspective would understate the immense role Susman played in creating a growing and profitable company with an envious set of values that existed beyond PR-speak.
In 2010, when Susman was due to retire as CEO, the group was enduring something of a post-financial crisis lull in performance. The lack of an obvious successor in SA, combined with Moir’s success in finally turning Country Road to account, ensured his name headed the list of CEO candidates. Moir’s abrasive management style combined with his energy and optimism were seen by analysts as useful for a company that might have overdone the "values" dimension of the business.
In 2010, the year Moir took over, Woolworths was able to boast reasonably strong key operational measurements.
Revenue had grown 13% a year over the previous five years and was then at R23.6bn; operating profit by 6% a year over the same period; return on equity was an impressive 39.4%; return on assets (of just over R9bn) was 19.3%; operating margin 7.1%; and the debt ratio (interest-bearing debt as a percentage of total assets) was at a seven-year low of 17.3%.
The share price (on 760-million shares) reached a high of R25.80 during the year to June 2010 and the dividend yield was a generous 4.2%.
Moir was handed a steady, profitable business with a proud heritage. It quickly became apparent why Susman had placed so much faith in the fast-talking Moir; all the corporate vital signs soon become significantly stronger. By 2014 revenue was touching R40bn and the operating margin was 9.9%. Return on assets (of R14.4bn) was 30.4%; return on equity was 45.1%; the debt ratio a mere 5.5%. The share price had risen to R70.68 and the dividend yield was 3.2%.
At that stage, Moir was headed for hero status. Investors loved him, the board loved him and perhaps most dangerous of all, the media loved him.
Of course, this adoration wasn’t universal — squeezing that sort of performance out of a business inevitably creates some victims.
Woolworths shop-floor workers, for instance, didn’t hold him in high regard. A recent Constitutional Court ruling, which stipulates that scores of employees dismissed in 2012 must be reinstated, suggests this. More recently, the nonpayment of bonuses will not have won Moir many friends among the group’s tens of thousands of employees. Nor will the fact that Woolworths did not launch a new scheme to replace its generous 2007 BEE scheme, which is still paying attractive dividends.
And then there are the Woolworths franchisees, who had made a significant contribution to the group and were mercilessly forced out not long after Moir arrived.
"Moir had just taken over and felt the franchisees were a little too powerful, [so] he drove the repurchasing process," says former franchisee Dennis Hamer, who hasn’t much good to say about Moir but still thinks highly of Susman.
When things are going well this sort of collateral damage can be more easily accommodated; when things go badly they have a habit of coming back to haunt you.
Back in 2014, so large had the Moir myth grown that it seemed almost perverse not to allow his talent access to a much larger asset base. So, when the David Jones deal came along, he seemed just the man to pull off such a transaction.
And it was audacious. Not just in terms of price, which at R21.4bn was equivalent to one-third of the group’s market capitalisation, but also because that pricey purchase wasn’t even in tip-top shape.
There was also the fact that SA retailers had a grim record of trying to run profitable businesses in Australia: Woolworths itself had struggled for years to sort out the much less challenging Country Road.
Legend has it that when word got out in early 2014 that Australian retail chain Myer was in discussions to buy David Jones, Moir persuaded Susman to travel to Australia and, over a weekend, put together a A$2.1bn offer — almost 30% above the price being discussed with Myer. (As it happens the 30% premium is roughly equivalent to the R7bn write-off taken in the first half of 2018.)
Even Moir’s keenest fans gasped at it — the largest-yet deal involving an SA retailer.
As one journalist put it: David Jones had reported three consecutive years of declining profits, the business was riddled with inefficiencies and operated in a slow-growing market, particularly for apparel; online shopping was gaining traction over brick-and-mortar outlets; and the department store concept was losing vogue. Some buy.
Yet, within a few weeks, the market, always keen for a deal, especially a large one, began to see the upside, as Moir sold it. Synergies between David Jones and Woolworths’ SA base were touted to generate pretax and interest earnings of at least R1.4bn a year by 2019. And there were big plans to place up to 20% of Woolworths’ private-label products in David Jones stores.
At the time, midway through Jacob Zuma’s "lost nine years", the chance to create one of the largest retail groups in the southern hemisphere as a hedge against the frail rand was also deeply alluring.
Some analysts expressed concerns. But most were gung-ho, including Sydney-based retail consultant Stuart Bennie, who believed Moir was more than capable of driving meaningful change at David Jones.
"Apart from being a professional retailer, he has the added benefit of having lived and worked in Australia and he knows the market. David Jones has been in the doldrums for some time … Moir will fix this. Customer service has been a major issue; their private-label business needs an overhaul; their in-house strategy division has failed them," Bennie said.
Shareholders voted overwhelmingly to support the deal, taking comfort from the heavy-hitting board (Peter Bacon, Tom Boardman, Zarina Bassa, Lindiwe Bakoro, Andrew Higginson, Mike Leeming, Chris Nissen, Stuart Rose). These were surely no slouches inclined to rubber-stamp an extravagant transaction.
By 2018, the group’s vital signs turned sharply negative. Revenue was R70.6bn; operating margin was 7.7%; return on assets had fallen to 12.6%; return on equity was down to 20.7%; and the debt ratio 34.5. The share price had slumped too, to around R61.09, while the dividend yield was 4.4%.
Finally by December 2018, as Moir revealed last week, return on equity had plummeted to 16.6% — its lowest level since Woolworths listed on the JSE, in 1998.
So can David Jones be rescued?
It’s difficult to say, since it’s not just management’s inability to turn the huge David Jones ship around five years on that is in question. In a quirk of history, it seems Australia is dogged by the same macroeconomic and political problems that afflict SA. The country is in a prolonged state of political turmoil, personal debt to GDP is extraordinarily high, consumers are stressed and the currency has hardly moved against the rand since the deal was inked in 2014.
Meanwhile, with so much energy focused on Australia, the fraying SA clothing business hasn’t received the attention it needs. The group is now bleeding on two important fronts — and the churn in executives is not calming investor nerves.
Christo Claassen, who was recruited from Edcon, proved not to be as dramatically successful as Carol Grolman, who joined Susman from Edgars in the 1990s and played a major role in Woolworths’ clothing strategy at the time. Claassen left after a few short and unconvincing years.
His replacement, Truworths’ Manie Maritz, who will be joining only in 2020, has an excellent track record in men’s clothing but not so much in women’s fashion, where Woolworths’ challenges lie.
Today, the Woolworths share price sits at R45 — less than half of its post-David Jones elation peak of 2015.
Evidently, some shareholders see this as a buying opportunity. Allan Gray, for example, recently hiked its holding in Woolworths to 15.16%.
But others will have heard the "good buying opportunity" argument too often over the past three years to be lured by its siren cry.
SBG Securities, for example, is maintaining its sell recommendation: "In our view, the earnings outlook for Woolworths over the next two years remains weak. Significant debt refinancing, elevated capex and a subdued environment keeps us cautious."
The board must decide whether David Jones is a lemon and sell it, or persevere and preserve it
— What it means
Abraham says nothing has happened to make him change his expectation of a 6% fall in earnings for this full year, before a 10% increase in 2020. "There’s potential for anything really good or really bad to hit these numbers," he says.
Investors seem unsure whether to tough it out, or split and run.
The board is faced with a more extreme version of that dilemma: dump David Jones and move on, or hope for some recovery. Does it ignore Moir’s optimism, and extract Woolworths from its Australian nightmare, or does it strap itself in for a bumpy ride in the hope it will eventually have something to show for its audacious gamble?
Either way, the board is talking tough.
Asked by the FM whether it had set out any conditions which would trigger the sale of the troubled Australian business, the board replied: "David Jones has undergone a significant period of transformation and investment. This was required and always part of our strategy following acquisition. It has occurred during an unprecedented period of weakness in Australia’s retail market and this has seen strong headwinds at a time of change."
David Jones, the board said, "is now well positioned and we expect performance will benefit as the business moves out of the transformation phase to deploy its new capabilities. The executive team, with Ian, is committed and focused to leverage off the solid platform we have established."
Susman might want to hold out on the basis of Moir’s commendable performance at Country Road — an investment which Susman had been repeatedly urged to dump.
Which is why shareholders should welcome the refreshingly "dry" input from the incoming chair, Brody.
What’s clear is that time is running out to make the right call. The ice has never been thinner for Woolworths — or for Moir.
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