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Food and clothing retailer Woolworths is still a Vestact recommended stock in local portfolios. It has a market capitalisation of R57 billion these days, and is still in the JSE Alsi 40 index. The share price is at R54, compared to its all-time high of R103 in November 2015. In other words, we are still hanging in there, after four years of negative returns! Having said that, it's off its recent lows, of R45 a share.
There are two principal reasons for the slump over the last four years. The first was that the management team under CEO Ian Moir decided in 2014 to buy department store group David Jones in Australia for R21.5 billion. That required a fairly significant rights issue, which we all followed. That operation has struggled since day one. After much restructuring, business model tweaking and store refurbishment, the value of that asset has been written down in the books to R9.7 billion.
The second reason for the value loss has been the weakened state of consumer demand in the South African economy, given the stagnation in the labour market. The high-end Woolies food business continues to hold up quite well, but clothing sales have been tepid. In addition, a number of food and clothing retail rivals have upped their game.
In a trading update released on Wednesday, Woolworths reported food retail sales up 6.5% compared with like-for-like sales ended November 2018. The South African fashion, beauty and home unit grew sales by 2.8%. David Jones sales declined by 2.1%. Sales at the Elizabeth Street flagship store in Sydney (roughly 10%-15% of David Jones sales) were still affected by renovations.
So, what to do? In August 2018 I wrote a similar update to this one, arguing that "the Woolworths share price has come down to the point where all the bad news is baked into the price. We should all simply hang in there and wait for better days." That advice still seems sensible. At least the overall business has improved, and the write downs have slowed. Let's see how festive season trading goes.
