Woolworth's 6 month numbers

Woolworths released six month results yesterday morning. We had already been sort of primed during the course of last month, the 26 week trading statement was released on the 14th of January. Group sales increased 17.1 percent, if you exclude David Jones (acquired on the 1 August 2014), sales grew by 12.3 percent. Basic and headline earnings grew 52.8 and 44.9 percent respectively. Headline Earnings Per Share grew by just 3.6 percent, remember that there are far more shares in issue now, due to the rights issue. Clothing and General Merchandise sales grew 12.5 percent, a pretty pleasing result. The Food business grew sales by 12.1 percent, with price movement (inflation) of 5.7 percent. It all looked OK, Ian Moir suggested in an interview that they continued to take market share across their respective businesses.

There are some *nice* graphs in the analyst presentation, showing you the Woolies diversity, both geographically from a revenue perspective (43 percent Australia, 57 percent Africa) and from a turnover per segment. That is as follows, 14 percent Country Road (take me home), 20 percent Woolworths Clothing and General Merchandise, 36 percent Woolworths Food and the balance, 30 percent being David Jones (and his locker). Problems seem to be Womenswear in their Country Road stores down under. C'mon Sheila. It is also important to remember that this six months is being measured against five months of David Jones, on that basis, David Jones is not that flattering.

The outlook is mixed, whilst the group concedes that their core clientele in both South Africa and Australia are by no means immune to a global economic slowdown of any sort, their trading for the first six weeks of this year was in line with the results for their first half. Their plan of action is to review their cost base and continue to sweat CAPEX as best as they can, I suppose this is always a natural response.

I like the CEO Ian Moir, I think that the group has done an amazing job with the clothing over the last half a decade. My kids actually prefer this destination to all others, when it comes to clothes and food. I do too, I have shareholder user biases unfortunately. You have to use the products that you are a shareholder of, that is the way that it goes in my family, and generally in this office as well. It does also help to get the user experience, talk to the staff, observe subtly.

The stock however got pounded like a tough steak on a day that the rest of the market was selling off heavily. In part there were a couple of reasons, I will include a few from the presentation. "South African economy likely to become more constrained". Yip, sounds about right, I think that this is kind of overstated, we are not Greece (to paraphrase the Spanish prime minister Rajoy). And then "Australian economy and retail environment to remain tough in the short term."

The real clincher I guess was the Janet Yellen line: "Both economies are commodity-based and therefore reliant on China". This is true. We do both (Ourselves and Aussie) have more diversified economies than say for instance Russia, or Angola, or Nigeria for that matter. One line in there that we liked equally: "Expect the upper income consumer in both regions to remain relatively resilient." Also true, whispers are of increased taxation for high income earners here in South Africa might test this theory. I still think that Woolies offers a quality proposition, i.e. you get what you pay for. Their returns policies are excellent, their staff is incredible when compared to their competitors. Shoppers judge value for money.

The stock closed down 7.65 percent on the day. Their "sector peers", stocks like Truworths and The Foschini Group sank 3.74 and 5.86 percent respectively. Pick n Pay lost 0.59 percent, Shoprite 1.1 percent, those are the food retailers. So I guess you could say half the market and half the results that were not well received. The company does currently command a higher multiple relative to their peer grouping, that is perhaps one of the reasons. Whilst we note that there are several speed bumps and major obstacles, we continue to feel that management execution will be spot on and their target grouping will continue to be resilient, and newer customers will be attracted to their quality offering. We maintain our buy rating on the company, accumulate on weakness.