Published Date: 2019-03-19 | Source: INCE|Community | Author: Sifso Skenjana
Is the Woolies water worth is mettle? Will it amalgamate the value investors need? Or will it combobulate businesses strategy in ways it has no business doing so? Will investors keep it going, will they keep it flowing, like the water?
Business Model: Woolworths SA makes up 71.1% of group profit, David Jones 11.3% and Country Road Group 17.6%. They target an upper-middle-class consumer who is both health and brand conscious. The company is still able to attract relatively higher profit margins from its clothing business over the food business. However, the growth in the food business has outpaced that of the clothing business over the years, with the food business contributing 52% to the Woolworths SA profits.
Macro Landscape: The macro landscape remains tough for retailers. Unemployment remains a challenge, alongside no inflationary increases in tax brackets this year, and risk of higher interest rates all contributing to damp prospects for growth in disposable income for households. Retail trade sales accounted for roughly 35% of household consumption expenditure.
Results (Interim 2019): Fashion, Beauty and Home - online sales up 34.4%, gross profit margin 0.5% higher at 47.1%, and operating profit 11.8% lower. Food continued to grow ahead of the market, with sales up 6.3% (online sales growth, up 17.8%). Gross profit margin declined 0.4% to 24.6%. David Jones: January 2019 saw CEO David Thomas resigned for personal reasons. Total sales up 1.0%. Adjusted operating profit margin decreased from 6.9% to 5.7%.
Growth Prospects: The company last year wrote off R6.9 billion for its Australian subsidiary, David Jones, citing a cyclical downturn and structural changes in the Aussie retail sector. And locally the retailers will continue to feel pressure, particularly on the back of a depressed consumer. The growth of online shopping presents good growth opportunities for Woolworths. Retailers are generally quite cyclical, but can still form an integral part of a balanced portfolio for long term investors. Woolworths should continue to benefit from the growth in the food business, and we expect them to continue to innovate toward the client-centric product marketing and promotion.