Woolworths 6M - A company in transition

Yesterday Woolworths released their 6-month trading statement. Off the bat, you can see the company is in a transition phase. Locally they no longer have the luxury of taking market share from Edgars and Stuttafords, coupled with three years of poor economic growth. In Australia, the David Jones turnaround is still in full swing and still has another 18-months to go before tangible results will be seen.

The David Jones purchase is part of a string of poor international purchases by South African CEO's. Poor South African growth and cheap debt, were excellent reasons to spread their wings on the international stage. For Woolworths shareholders, the David Jones asset was bought for A$ 2.1 billion and has now been written down by A$ 712.5 million. Not to mention the R400 million odd spent on the rights issue needed to raise the funds.

Here are the headline numbers, Sales are up 2.5% to R38.8 billion, HEPS are down 15%, and the dividend is down 18.4% to 108.5c. The pain has come from 'Fashion, Beauty and Home' where sales were down 3.4%, this was compounded by operating profit margin dropping from 16.5% to 14.4%. In Australia, with all the changes being made, David Jones saw sales decline 3.3% and its operating margin drop from 9.6% to 6.9%.

The bright spot is the food offering. Sales were up 9.4% and operating margins grew from 6.9% to 7.4%. That is the beauty of the Woolies business model, there is some diversification. It is not like a TFG that is purely clothes or a Shoprite that is mostly food retail. In our view, the biggest short to medium term threat to the Australian business is the recent arrival of Amazon. Ian Moir on CNBC last year said he wasn't concerned about Amazon; maybe he was just putting on a brave face? In the next two years David Jones wants to have 10% of their sales coming from online, the company definitely acknowledges the importance of being online.

The stock was up 2% on these results. Going forward there is RSA optimism, which should be good news for retailers. Added to that the David Jones turn around should start showing in the Woolies share price in the not too distant future. The stock market is forward-looking, if profits are expected to rise in the next 18-months, it will be featured in the valuation today.