Woolworths is planning to invest R8bn in the next three years, some of which will be used to expand its food business to tap further into the lucrative pet, wellness and liquor markets.
Investments will also be made to enhance data technology and analytics and online capabilities.
CEO Roy Bagattini said this week a strong balance sheet had given Woolworths the “capacity, the fire power to shift some of our focus to investing in new growth opportunities and improving shareholder returns”.
The group, which grew adjusted profit before tax by 11% to R5.1bn in the year to June 26, tripled its annual dividend and said its balance sheet was the healthiest it had been in eight years. About R12bn of debt was slashed in just two years and the group now has a net cash of R229m.
New food stores will also be added. Store space, including expansion of existing stores, will likely increase 10% over the next three years, having only grown about 3% since 2020.
“On the food side, we are reinvesting into that business. Over the last several years with David Jones being a distraction for the group, we almost underinvested in certain parts of the business so we are redressing that on the food and fashion sides of the business.”
The returns the group makes on this investment will be very important. Hopefully, Woolworths gets it right, but it is not a guaranteed slam dunk
— Richard Cheesman, senior analyst, Protea Capital Management
In its foods business, the market could expect to “see some new ideas, some great concepts and more capability going into our ecosystem”.
Bagattini said the group needs to boost its market presence.
“We will do that in the bricks and mortars stores, making some of our bigger stores even bigger because there are opportunities in certain categories where we are way over trade relative to the space we have. We are going after this in terms of pet, wellness and liquor.
“In addition, we are also investing in our online business to dramatically increase our market place presence.”
A “disproportionate” amount of the new investment in SA will be devoted to digital and data. “This is [investment] in the technology, in all the digital tools and the enabling capabilities that will help us run our fashion and food businesses more efficiently.”
The group would invest in “transforming the back-end capabilities of FBH [fashion, beauty, home] right from inception in how we buy and ultimately how the product gets onto the shelf”.
Protea Capital Management senior analyst Richard Cheesman said the investment plan was the right course to take as long as Woolworths reaped returns on any new stores it rolled out, adding that the plan represented a large chunk of the retailer's market capitalisation of R55bn.
“The returns the group makes on this investment will be very important. Hopefully, Woolworths gets it right, but it is not a guaranteed slam dunk.”
The move to invest comes as the company is finally seeing a turnaround in its FBH division and Australian asset David Jones, which has been a drag on the group since its acquisition in 2014.
Woolworths, which previously had to impair R13bn of the R21.4bn it paid for David Jones, said the Australian chain's adjusted earnings before interest and tax (ebit) had grown by 86%. About R1bn in cash had also flowed into SA from David Jones with Woolworths expecting a further R500m to come through in the “next couple of weeks”.
Its FBH business, which is in the middle of a turnaround after years of lacklustre performance, reported adjusted ebit that was almost 49% higher.
Growth in the group's food business, normally its top performer, was relatively slow. Bagattini conceded this had lost market share over the period, “having gained disproportionate market share over the Covid period” when people bought more ready-made meals and fresh food to prepare at home.
Woolworths Food grew sales 4.2% in the year to June 26, and still “had the top position in the premium food sector by a long way”. Bagattini said the food division could do better, and this was part of the reason more money would be invested in it.
“This year our top-line growth may not have performed as well as it typically has in the past but if you look at our financials, we are still the leader in ebit margin by a long way, as well as the return on capital, which is multiples of that of our peers, at north of 70%,” Bagattini said.
Cheesman said Woolworths had reported strong results with all the “other [non-food] divisions doing quite well, which is different to what has historically been the case where food did well and everything else lagged”.
The balance sheet was “solid” and there was some upside off a low base from the Australian businesses, which were affected by lockdowns during the period.
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