Woolworths, having unshackled itself from its disastrous Australian department store business David Jones, will focus on its South African operations, investing R10bn in growing its food and fashion sectors and expanding its distribution centre in Midrand.
“If we look at our businesses over the past few years, we have been underinvesting. Now it’s time to come back to the mothership and ensure that we are in great shape. We have a loyal customer base and we need to ensure we deserve their love and trust,” said Woolworths CEO Roy Bagattini this week, after the release of the group's annual results.
Woolworths’ balance sheet was now the healthiest it has been in more than a decade, with gearing well below targeted levels, he said.
“We are going to invest significantly in our remaining businesses. We have R10bn of capex that we plan to invest over the next three years. Part of this will include our distribution centre, which will require R1.5bn, as well as investing in digitisation of stores, online experience, data, data analytics and innovation. We have used some of the proceeds to buy back almost 7% of our shares at a price that is well below our intrinsic value,” said Bagattini.
Woolworths closed a difficult chapter in its history after finalising the sale of David Jones to Anchorage Capital Partners for R7.7bn. It paid R20bn for David Jones in 2014. The sale removes R18bn in liabilities from the balance sheet.
Asked about the lessons learnt from the David Jones acquisition, Bagattini said: “How many days have you got? David Jones just wasn’t the right fit for us strategically. It sits with a cost base of R10bn so you need significant turnover to cover that. Another issue was the building leases we found ourselves in and big obligations.”
However, Country Road, another Australian business, has yielded results for the company, Bagattini said, adding that Woolworths was preparing to work on establishing a presence in new markets that do not take capital out of South Africa.
“There was ample opportunity to grow this part of the business in Australia, which was an exciting proposition for the company.”
Bagattini said Woolworths planned to invest in the fashion businesses as the growth of the Country Road group in South Africa over the past few years was in the double digits, with a turnover of R1bn in the year to the end of June.
The Country Road group has five brands: Country Road, Mimco, Politix, Trenery and Witchery.
“The sales of those brands outside Australia have essentially been in South Africa only. In South Africa, you will find the demand for those brands in existing stores. We expect to see that continuing to grow,” he said.
Who wouldn’t want our lunch? When you are a market leader, you have a target on your back
— Woolworths CEO Roy Bagattini
Bagattini said the single biggest investment Woolworths planned to make in the food business over the next three years would be the expansion and modernisation of the distribution centre in Midrand, Johannesburg.
“We will [also] expand our store footprint, making stores bigger and putting new stores in the market. We will also be looking at new formats for stores and looking at new technological formats and digitisation and integration of brick-and-mortar stores with online only solutions,” he said.
Independent analyst Simon Brown said investing in the Midrand distribution centre was a sound move for Woolworths, as other retailers in South Africa were investing in a similar direction with varying levels of success.
“The distribution centre in Midrand will work well for them. Pick n Pay is finding it harder than anticipated but it has given Shoprite good returns. They [Woolworths] focus on what they do well and they have always been good at food.”
Brown added that the group needs to get fashion right and Bagattini's background in clothing retail “will be a big help”.
Woolworths said its fashion, beauty and home turnaround strategy was gaining traction, with turnover and concession sales growing by 8.9%, and by 8.3% on a comparable store basis for the year.
Asked about competition for Woolworths Dash from Checkers’ delivery service, Bagattini said: “Who wouldn’t want our lunch? When you are a market leader, you have a target on your back. We commend them on their efforts. But our focus is not on them, it’s on us.”
The group's online sales increased by 28.5%, contributing 3.8% of South African sales, supported by the rollout of Woolies Dash.
“We have a unique food business with a unique proposition and foundational capabilities which are not easy to replicate,” he said.
Its food business grew turnover and concession sales by 8.5% and by 6.3% on a comparable store basis for the full year.
Brown said the challenges that came with buying David Jones were understandable as a big acquisition could cause distractions and there was “great potential to take one’s eye off of the ball”.
“I think it’s fair to say the David Jones disaster is behind them. They have exited and it cost them and shareholders a pretty penny. But they are done. We hope that they learned the lessons as they put it behind them.”
Interim CFO Zaid Manjra said selling David Jones allowed the company to embark on a share buyback of R2.9bn, and achieve a net borrowing position of R2.5bn. He said turnover was up 7% to R85.7bn and profit before tax was up 29.5% to R6.7bn.
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