Results for the first half

Woolworths, one of our preferred retailers, reported numbers for the 26 weeks to end 29 December 2013. This is the first half of their financial year. Byron said that I stole his thunder because he wanted to write up about these numbers, so I had better make sure that I do a fine job, or else...


Firstly, and as strange as it sounds, what does Woolworths actually do? The simple answer is that the company sells clothing, food and general merchandise and it is fair to say that they are a premium brand in South Africa, in a sense soft luxury in the food department and they posses upmarket internal brands that certainly have been winning market share. Woolworths strive for quality over quantity, as a consumer I have never had a problem with any of their products, but just the other day I fielded a call from a Cape Town based client who said that the Woolies quality down the road from her (food) was poor. Michael tells me that often the Woolies in his home town has bare shelves on a Saturday by lunch and the poor staff have to shrug their shoulders. In Gauteng and in particular around where I work and live, I never have that problem and I am very spoilt with high quality (dare I say world class) products from Woolies.


The only point that I am making is that you must be careful to translate your own experience (good or bad) into whether or not the company is a good investment. Although that of course does define whether or not you, as a consumer, are going to use their services or buy their products? Of course it does and Woolworths have always prided themselves on being able to deliver the best quality product at the most reasonable price.


Numbers time, because at the end of the day the company could sell manure and be profitable, what matters to their shareholders is whether or not they manage to maximise profits. Sales for the half registered 19.4 billion Rand, a 16 percent change on the comparable period. Profits for the period registered 1.567 billion Rand, an increase of 22.1 percent. The company paid nearly 600 million Rand in taxes, thanks Woolies for contributing to the national fiscus, or rather thanks to the customers, who directly make sure that the company exists. The famous exchange between Henry Ford (the second) and union leader Walter Reuther, in which Ford pointed to automated machinery on the factory floor and asked Reuther how he was going to get the robots to pay union dues. Reuther snapped back with a fabulous answer, in the form of a question, Henry, how are you going to get them to buy your cars? Quite.


Headline earnings per share increased by 17.2 percent to 192.4 cents, the dividend declared for the half was 101 cents, generous payer Woolies. After tax that amounts to a little more than 85 cents (85.85), payable on the 10th of March.


On a segmented basis, Woolworths foods turned over 15.3 percent more than the prior period, just shy of 9.5 billion Rand, with profits before tax adjusted increasing 16 percent to 586 million Rand. So let me get this right, the company paid more in taxes than they earned in their foods business? But the food division as you know is not very profitable, so whilst the clothing and general merchandise division grew profits by 7.4 percent, Country Road with a 51.9 percent increase in profits are breathing down the Food divisions neck in terms of absolute profits. But yet is only 41 percent of sales. So that just goes to show you how much more profitable clothing is.

We did however speak about the inclusion of the Witchery business inside of this reporting period, Country Road, which reports as the Australian business. In Australia this is a premium business, as you well know, the clothes at Trenery and Country Road are not cheap. There are of course huge currency implications here, the Rand has weakened significantly over the last year to all the major currencies. Not that the Australian Dollar has had a good time of it lately, this morning there was an Australian unemployment read that was weak, their worst level in ten years, which topped six percent. The horror of it all, but I guess that these are rich people problems. Over the last year the Aussie has gained 8.4 percent to the Rand. Over the last five years, it is much more dire for the Rand, the Aussie is 53 percent stronger. Phew.


In the commentary: "In Australia, where consumer confidence remains cautious, there are signs of an improved retail market and we expect sales to be ahead of the market." so whilst we have to pay careful attention to the consumer here in South Africa, with Woolworths business in Australia we will have to do the same. In South Africa, the commentary is that the lower and middle income groups are under pressure and consumer associated debt in those LSM classes remain elevated. But about their core customer base: "the upper income segment in which we operate continues to show resilience. Trading for the first six weeks of the second half of the financial year has been positive, and we expect sales growth to be broadly in line with the first half."


So what now as an investor in Woolworths? I guess the cycles are unavoidable as consumers, they come and go as interest rates rise and fall. Consumers repair their personal balance sheets when their financial situations look dire. The reaction to what look like decent results is that the stock is down over three percent, and trading at the same multiple as the rest of the sector (forward), I think that it offers good value at these levels. It is a growth company operating in a tricky environment, but they have the right mix and great management. Strangely Ian Moir is listed as Australian, he has a deep Scottish accent, perhaps some United fans would want David Moyes to naturalise as an Australian. Give the man a break, a couple of years at least! Ian Moir on the other hand has another tough challenge on his hands, but I think that he is definitely up for the challenge.