Woolworths goes large after dry spell

Woolworths shareholders will have to swallow some short-term pain given CEO Roy Bagattini’s ambitious R10bn investment plan.

But he describes it as the “single biggest opportunity to reset value” since he took over in the first quarter of 2020.

After all, Bagattini has spent the past three years simply fixing the mistakes of his predecessor Ian Moir: slashing debt, selling the disastrous David Jones department store and fixing the South African clothing, home and beauty business.

In a nutshell, Bagattini wants to ramp up Woolies’s store network, beef up its Midrand distribution centre and spend money on its digital offerings, using internally generated cash.

Bagattini’s corrective measures are evident in Woolworths’s latest year-end results, where turnover rose 7% to R85.7bn and profit before tax increased almost 30% to R6.7bn, largely from its food business. Woolworths hiked the dividend 36.4% to 313c. The group also embarked on the largest share buyback in its history, snapping up almost 7% of its own stock.

Both Woolworths and Shoprite shares are up 11% since January, though over one year Woolworths has gained 24.6% against Shoprite’s more muted 10.3% rise

It’s all gone a long way to make Woolworths the best-performing retail stock on the JSE alongside Shoprite this year. Both are up 11% since January, though over one year Woolworths has gained 24.6% against Shoprite’s more muted 10.3%. Over three years, Woolies has returned 153%, including dividends, while Shoprite has returned 132%.

Since Bagattini started, the retailer has doubled profits, he says. Key to this was getting more full-priced sales in clothing and homeware; that’s risen from just over 70% to more than 80%. Markdowns were cut by more than nine percentage points to 13% and Woolies has removed almost 70,000m² — or more than 15% of unproductive space — from its stores.

Yet food is still the most critical business to Woolworths’s standing, notwithstanding the costs of load-shedding (the group spends R20m-R30m a month to counter power cuts).

“In the case of food, we made the commitment to strengthen our ‘holy grail’, which balances giving our customer the best overall proposition in the market and our shareholders the highest return on capital in our sector,” says Bagattini.

“The group has improved customer availability by over two percentage points over the past three years. This, and growth in new customers and average basket spend, is real testimony that we’re still raising the bar.”

Woolies plans to open more coffee shops, standalone (and smaller) food stores in urban areas and townships, and dedicated liquor stores and pet outlets. 

As for the fashion side of the business, “I’d say we’re about halfway through our turnaround”, Bagattini tells the FM. Woolworths has cut its offerings and stopped trying to be “everything to everyone”. 

Intriguingly, Woolworths’s margins in the fashion and beauty business in South Africa at 13.6% remain higher (before load-shedding costs) than for its Country Road business in Australia, where they stood at 12.4% for the period.

Protea Capital Management senior investment analyst Richard Cheesman says running stores in Australia is more expensive than in South Africa due to factors such as higher labour costs and rents. Woolies’s local operations also benefit from excellent logistical infrastructure. 

Woolies expects the going to be tough in both countries for the foreseeable future; in South Africa, because of its power supply problems, and in Australia, due to higher inflation and interest rates which have had a marked effect on retail foot count.

But Bagattini says the runway for Australia is interesting, particularly now that David Jones has been sold. The growth of the Country Road Group in South Africa over the past few years has been in the double digits, with a turnover of R1bn in the period under review.

About concerns that Woolies’s local target market is shrinking due to emigration and the severe pressure the middle class is now under, Bagattini says the group has several million people on its loyalty programme and this number continues to grow (over the past year, Woolies added half a million new customers).