After a gruelling three years, there may just be light at the end of the tunnel for Woolworths. The retailer’s stock plunged 38% in that time, largely because of its 2014 deal to buy the 181-year-old Australian department store chain David Jones for R23.3bn.
Last week, CEO Ian Moir must have breathed a sigh of relief when he announced that its sales had grown 5.9% for the 53 weeks to the end of June — 5.1% if the movement in the Australian dollar is excluded.
As asset manager Vestact put it, this provided a glimpse of "green shoots in the SA operations".
The star performer was the food business (sales up 9.8%), which has become a staple in the lives of busy wealthy South Africans, who seemingly can’t live without its Chuckles chocolates or carb-conscious ready-made meals. David Jones was still weak (sales up just 1%), but fashion recovered to some extent, growing 3.5% in the year.
Investors reacted as if this was some sort of sea change, causing the stock to bounce 7.8% on the day.
Patrice Rassou, head of equities at Sanlam Investment Management, says things seem to be looking up. "If you compare it to the situation they were in a year ago, at least their home base seems to have stabilised. Now it’s a question of getting Australia to get some traction," he says.
Moir’s company also got a welcome vote of support from global brokerage JPMorgan this month. In a new research report JPMorgan tips Woolworths as its top pick in SA’s retail sector, which had less-than-sprightly 1.7% sales growth in the three months to May.
Despite the trauma for investors over the past few years, JPMorgan’s analysts say Woolworths is likely to "serve investors best over the coming years", compared to its rivals.
"[Woolworths is] the only SA retailer showing sharply improved domestic momentum … we think lingering doubts about the SA business will be quashed by the upcoming [full-year] result, and we expect Australia’s value to be unlocked over time," they say.
While David Jones "remains a problem", the analysts say this business "has almost zero value ascribed to it in the share price, and this value should be unlocked over time".
The entire Australian business, which is made up of David Jones and Country Road, accounts for just a tenth of the share price. And Woolworths does have options to unlock this trapped value, including possibly relisting it on the Australian Stock Exchange, or unbundling it entirely to Woolworths shareholders.
JPMorgan’s second pick is a resurgent TFG. The company is gaining market share by providing better value to customers, offering differentiated brands, among other things. "We see Foschini as the most innovative of the SA retail peers now, in terms of use of technology to drive sales and rapid response sourcing," it says.
The analysts were far less convinced by Mr Price, Truworths and Pepkor.
More good news for Moir is that Woolworths’ fashion, beauty and home departments are apparently beginning to resonate with customers on the shop floor in a way they haven’t for years.
Says Rassou: "You have to execute very well and know your target market very well. If you get your fashion wrong or your offering wrong, the customer is very unforgiving and they’ll change shops just like that."
However, he says the elephant in the room is still the struggling Australian business. "The key remains whether we will see a turnaround in the Australian business, which is a longer-term issue … [the issues include] a food strategy which doesn’t seem to be suited for the Australian market."
Given that David Jones was Moir’s signature deal, he’ll be desperate to show he can fix it.
Part of David Jones’s problem is that the "department store" clothing model is in serious crisis globally. Yet Woolworths is doubling down — revamping its 12-storey flagship store in Elizabeth Street, in the heart of Sydney’s CBD, at a cost of more than R2bn.
The relaunch will take place on September 4. The glitzy new store is expected to boast 55 new brands, a top-floor champagne bar and the Rose Clinic, offering customers older than 40 free breast screening.
Veteran retail analyst Syd Vianello says overhauling the Sydney store to make it more "upmarket" is a major gamble. "Do Australian consumers have that kind of money to do that kind of shopping? There are very wealthy people in Australia. but are there enough of them to support the kind of model that they’re working on?"
Australian TV network 7News reported last week that David Jones would slash 120 jobs in the country as it battles to remain relevant.
RetailOasis analyst Steve Kulmar told the TV channel that the Elizabeth Street upgrade shows that David Jones is still catering to older customers, rather than attracting newer ones. "It shows that DJs has completely ignored the massive generational shift that’s been happening for the past 10 years," Kulmar said.
Woolworths is aware that to fix David Jones and get its Australian strategy right will come at a cost. As the company puts it: "The combination of creating a small number of luxury flagship stores, more than 20% space reduction and a greater focus on own-label clothing for mid-market stores is likely to keep margin constrained."
But Woolworths argues that the heavy lifting has already been done in Australia, and the new online trading system, new brands and new systems should begin to pay dividends.
In the end, though, if David Jones begins to work, it’ll be a bonus. As JPMorgan puts it: "If the SA business really starts to perform, investors (who have few other SA options) will want to increase exposure and will be more prepared to see past David Jones."
Clearly, investors are already betting on it.
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