While on the surface Woolworths’ FY2024 result disappointed, with some, in our opinion, less than desirable strategic and worrisome operational developments, there are some notable positives which may be enough to warrant some interest.
- The apparel chains, Country Road (CR) and Fashion, Beauty & Home (FBH) in South Africa misfired.
- CR’s alarming almost R1.7bn drop in operating profit was plausibly explained by the loss of access to the scaled admin & support services it used to share with David Jones (DJ). This necessitated the investment in implementing a fit-for-purpose operating model, enabling a common platform of capabilities across brands, and sustainable structural economics.
With these separation costs non-repeating in FY2025 and the residual ‘stranded’ costs previously borne by DJ, reduced and redistributed among the other divisions over the next approximately 18 months, the operating is expected to normalise to >10%.
- Less convincing was management’s assertion that the revenue decline was entirely due to the cyclical downswing in Australian. Why would revenue growth severely lag the overall apparel segment performance, unless there was an assortment or some other chain-specific issue?
- Equally dubious is the FBH fix. The blame here was squarely shouldered by availability at least 10-20 points off where it should be; but are we ignoring the potential assortment undesirability elephant in the storeroom that may have to shoulder some of the burden?
- While we anticipate the drawing of clear lines of responsibility for availability at the individual store level, this does not address FBH’s seemingly perennial problem of erratic and often fleeting assortment desirability.
- Two strategic tweaks we are also dubious of are management’s doubling down on: 1) plans to lift its exposure in African continent again, and 2) the continued rollout of smaller-format, curated W-Edit stores in select neighbourhood locations that can’t support a full-assortment store.
- In our opinion, while these stores may broaden the catchment are for sales, Woolworths runs risk of continuing to miss styling, sizing, and so increasing group stock levels and cash tied up in the higher inventory. The correct curation of assortment is fraught and has been repeatedly missed in past attempts; a fact acknowledged by the CEO.
In our opinion, Woolworths Food stands head and shoulders above all the other SA food retailers – yes, even Checkers – in terms of innovation, shopping experience and after a R900m multi-year investment in pricing, increasingly value for money. This is evidenced by consistently ahead-of-the-market sales growth and consistently high margins.
The rising profit contribution from Food has the added benefit of boosting the exit price-earnings ratio (PE) that we apply in our valuation; combining a lower Apparel PE (~40% of profits) with a higher PE (~60% of profits) to get an elevated blended valuation multiple.
The further investment behind elevating the online delivery capability of Dash*, presents another fast-growing channel of growth for Woolworths Food.
* Already profitable on a fully-costed basis for almost two years now.
Finally, not to mention the real opportunities to capture additional growth by further leveraging Woolworths Food Service and adjacencies such as Pets and Beauty.
