Retail

The Company

Woolworths Holding is an investment holding company, listed on the Johannesburg Stock Exchange, and operating through two subsidiaries, Woolworths (proprietary) and Country Road, as well as joint venture Woolworths Financial Services. Woolworths is a chain of retail stores in South Africa and certain countries in Africa and the Middle East that offers a range of clothing, food and general merchandise, mostly under its own brand.

Woolworths contributes 79% to group turnover and 74% of the pre-tax profits, comprising the Woolworths Clothing and General Merchandise and Food divisions. Food sales make up approximately 49% of revenues and about 27% of profits, due to higher clothing margins. The clothing and general merchandise division contributes 30% of sales and 47% of profits. Woolworths targets the living standards measure 9-10 groups, and is predominantly a cash-based retailer with around 18% of sales on credit, a relatively low credit offering, particularly in comparison to its retail clothing peers.

Country Road is a chain of stores and concession outlets in Australia, New Zealand and South Africa, offering a range of clothing and homeware under its brand name. It is listed on the Australian Stock Exchange and, as of the end of December 2013, contributed 22% to group profit, in addition to being a significant rand hedge. In October 2012 the Country Road Group acquired Witchery and Mimco for $180m. Half-yearly sales were buoyed by this acquisition, with the Country Road Group posting record net profit of $38m in the half year to December 31, 2013, up 72% from the same time in 2012.

Woolworths Financial Services is operated jointly with the Barclays Africa Group (formerly known as the Absa Group). Woolworths owns 50% in Woolworths Financial Services (less on share) and the profits are equity accounted in Woolworths Holdings. The company provides customers with a credit offering to assist them in purchasing merchandise in the stores, in addition to its other offers like credit cards, personal loans and insurance products. WFGS contributes 4% to the group’s pre-tax profits.

As of the first half of 2014, the company owned 628 Woolworths stores (80 of which were located outside of South Africa) and 485 Country Road stores (25 of which were located in the country). In the last five years Woolworths has achieved average sales growth of close to 12% per annum and annual profit growth around 10%. The expansion of Woolworths’ operating margin has largely been attributed to the firm’s mixture of price, innovation and quality.

New Developments

On April 9, 2014 Woolworths acquired Australia’s second-largest department store, David Jones, for A$2.12bn ($1.98bn). In addition, Woolworths bought out the minority holdings in Country Road, as it had previously owned 88% of the business. The deal – which is the biggest for Woolworths to date – should help grow the company to become the leading retailer in the southern hemisphere, as the Australian market is characterised by resilient consumer spending, a strong local currency and lower domestic interest rates.

Growth of the South African business and Country Road will still drive earnings over the next few years. Increasing basket size in food and a greater share of non-fresh groceries and rising upper-market sales with the Country Road, Trenery and Witchery brands in clothing are still key over the short to medium term. The potential to use David Jones as a springboard to Australia’s market, with both a clothing and food offer, is a real opportunity.

We believe achieving increased earnings from David Jones within a few years and expanding the offering in terms of both store base and product offering will be the determinant of the value. We also believe that Woolworths has other levers, such as extra margin gains, cost savings and efficiency benefits, which have still not been factored into the earnings and hence present further room for growth.