Investors made a rather dour pronouncement on prospects for Cape Town-based retailer Woolworths despite the company releasing sturdy interim results to end December 2015. At the time of writing Woolworths shares were well off the R106 high seen on the JSE in November last year.
Woolworths, however, posted sterling results with revenue increasing 17% to R35,5bn and pre-tax profit up 16,5% to R3,4bn. Directors also showed their confidence in the robustness of the business model by hiking the dividend a hefty 38% to 133c/share. It was also encouraging to see that the core Woolies offering in South Africa remained strong in the interim period.
CEO Ian Moir reported that clothing and general merchandise had a much improved half with operating profit increasing by almost 15%. He said the results were driven by a good performance from core womenswear and menswear categories and a strong improvement from kidswear. The Food division again delivered a strong performance with sales up 12% and operating profit up by almost 18%.
Moir said the supermarket strategy was proving successful – noting that Christmas sales were strong. He maintained that despite the tough trading conditions, the businesses continue to perform well ahead of the market.
“Through our positioning as a leading southern Hemisphere retailer, we are able to leverage our scale and global sourcing strategy to deliver quality products at competitive prices for our customers.”
So what exactly spooked investors so badly?
Perhaps it was Moir’s admission that economic conditions were expected to become tougher, particularly in South Africa where interest rates are also likely to increase. But he did note that trading for the first six weeks in the second half of the financial year remained robust.
He expected the upper income consumer in both regions to remain relatively resilient. But there would be a concerted push to attract younger, more modern, black customers while maintaining the older, very loyal, more classic customer.
More specifically Moir expected clothing and general merchandise price movements to be in the 8% to 9% range for the rest of the year, while food price movement should be between 6% and 7%. And it can’t be all doom and gloom if Woolies anticipates full year growth in space to be 5% for clothing and general merchandise and almost 10% for the food segment.
More importantly, gross profit margins in the clothing section should be “broadly maintained” – although Moir said there would be some “price investment” in the food segment.
Over the years Woolies has shown an ability to adapt profitably to fickle trading patterns in the retail sector – which has been borne out in a series of strong profit performance in the last decade. In that regard, there will certainly be no resting on laurels in the second half and Woolies’ strategic focus will indeed be sharpened – especially on technology driven improvements.
Moir said that the company would focus on building stronger and more profitable customer relationships, drive synergies and efficiencies as well as embed sustainability throughout the business. He believed customer insights and data will drive and inform all Woolies’ business decisions.
“This will shift us from being a customer centric business to a customer driven group,” says Moir.
Moir explained that Woolies was intent on building a single view of its customers – enabling them to be recognised and rewarded in real time with delivery of personalised, seamless service across channels. This would require an effort to “digitally transform” stores by improving connectivity that would allow staff and customers to engage differently.
He concluded there would also be an increased focus on mobile commerce with investigations underway to establishing the potential for a single e-commerce platform across the company.
By Jenni McCann