Woolworths’ decision to siphon money from SA to help its floundering David Jones business has drawn withering criticism from analysts, who say it’s throwing good money after bad.
In a recent update, the retailer said that it was spending A$75m (close to R1bn) to further fund the Australian department store chain, as the pandemic has had a significantly detrimental effect on the business.
Evan Walker, portfolio manager at 36One Asset Management, says "it’s an absolute disgrace" that management "is throwing more money [into] a bottomless pit. It’s depriving the SA assets of proper capital."
He says Woolworths should find alternative means of financing David Jones — or sell it.
While Woolworths says the Australian operations have been ring-fenced, Walker is not convinced that this is the case and thinks the SA asset is liable for its lease commitments — as well as acting as a guarantor of debt covenants related to the Australian business.
Ultimately, what it means for the Woolworths investment, says Walker, "is that you can’t value this at zero, you have to value this at a negative value because they could keep throwing money at [it]".
While Walker reckons Woolworths has been less than upfront on its financial commitments to Australia, Jeanine Womersley, Woolworths group head of strategy and investor relations, tells the FM that though the balance sheets of the respective businesses in Australia and SA are interdependent, there is no direct link in so far as creditors and lenders are concerned.
She says that creditors (including banks, landlords and bondholders) do not have any recourse to the SA entity. "David Jones and Country Road Group are iconic brands in Australasia, with strong equity and consumer support. This specific financial support initiative, is not an equity investment, and takes the form of a secured loan facility to the Australasian businesses. It will only be utilised in the event that the businesses require incremental funds in the near to medium term following the disruption of Covid-19."
Iconic brands they may be, but the David Jones investment has been a huge thorn in Woolies’ side, almost from the start, and investors have begun clamouring for the Australian chain to be sold.
Some say Woolies should just give it away because of the irresponsible use of shareholder funds, which is dragging on the SA-listed entity.
But, says Jean Pierre Verster, CEO of Protea Capital Management: "Woolworths is in a tricky situation. If the holding company in SA does not support David Jones, they would need to write off the full investment, because effectively it is not a viable business on its own."
It’s worth recalling how much the David Jones disaster has cost Woolworths to date.
It spent R21.5bn in cash buying the chain in 2014, and has since written off about half the original investment price, about R12bn.
Clearly, the theory that an offshore asset earning hard currency would counter SA’s weak economy has backfired spectacularly.
Previous CEO Ian Moir, who drove the deal with the view to creating a leading southern hemisphere retailer, has since admitted he overpaid for the asset. He is now based in Australia, at David Jones, to unravel the mess.
Walker is scathing about Moir’s role in the value destruction that has taken place — amply reflected in the Woolworths share price, which is now bumping along at less than R35 a share. This is a fall of 53% over five years.
"Ian Moir has destroyed R40bn in shareholder value and still has a job," says Walker.
He adds that the R21bn spent on David Jones could have been in a bank account earning interest — and there’s the opportunity cost too.
Verster says it’s as if there’s always just one more investment needed to get the ship into the dock. "One could assume Woolworths has done the right calculations … apparently if it just gives another billion then it can save the business."
If Woolworths is to be believed, this is the last bit of support that David Jones can expect.
Says Womersley: "Financial support beyond this initiative is not being contemplated at this stage."
Woolworths has so far tried a number of strategies to get David Jones working, including the introduction of a high-end food division, along the lines of Woolworths Food.
But Verster is critical of the decision.
"In SA there was a big gap for an upper-end food retailer; there is no such space in Australia, which has lots of delicatessens, fresh-food outlets and locally sourced high-end food stores. They misread the opportunity," he says.
It’s not as if Woolworths is not aware of the situation: it recently appointed investment bank UBS to review David Jones’s capital structure and to consider selling its local property portfolio, to reduce debt.
New CEO Roy Bagattini confirms that the business will be looking to reduce store numbers and sizes to turn things around in Australia.
David Jones has 48 stores around the country and plans to reduce its floor space by more than a fifth in the next five years.
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But much of its turnaround hinges on a single store: Sydney’s Elizabeth Street, where the retail chain and its brand partners including Dior, Chanel and Gucci have spent a combined A$420m on a major revamp, with plans to create an upmarket experiential destination.
The market will want to see Elizabeth Street (which generates about 20% of group sales) gain traction. Unfortunately, its reopening coincided with the Covid-19 lockdowns.
And what if this doesn’t work, either?
"One would hope this is the last throw of the dice. If this doesn’t work, they should turn off the lights at David Jones. Sell the business or close the doors, and give back the keys. This is the last chance … though I thought the previous chance was the last chance," Verster says.
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