This would benefit shareholders who in the last five years have suffered “substantial value destruction” argues a report in July from emerging market stock analysts Rod Salmon and Chris Gilmour. Woolworths owns the David Jones and Country Road clothing brands in Australia.
Woolworths Foods, as a separately listed entity, would enjoy a higher operating margin and better barriers to entry than peers such as Pick n Pay, Shoprite and Spar, the report says. “A focused food retailer with the market positioning and customer profile of Woolworths Foods would become one of the most highly rated retail companies in South Africa.”
- The report argues that Woolworths may need to write down the value of David Jones by between AU$600mn and AU$700mn (6.5b-7.6b rand, EU366m-EU427m).
- There are “no synergies or rationale to keep the food business tied to an ailing department store in Australia and a struggling quasi-department store in South Africa,” it says.
“The argument that an exit from Australia would be beneficial to shareholders has merit,” says Alec Abraham, senior equity analyst at Sasfin Bank in Johannesburg.
- “Woolworths shareholders could benefit from improved management focus on tackling the domestic challenges facing the Fashion, Home & Beauty (FHB) business,” Abraham says.
- “After years of failure to deliver on the strategy of supporting FHB sales growth by enticing walk-through ‘upper income food’ customers to ‘shop apparel’, and with no obvious operational synergies, there appears to be little support for these businesses to remain joined,” Abraham says.
- The practical steps towards separating the businesses would probably be challenging and Abraham sees no clear path to execution at present.
Woolworths said in March that proceeds from the sale of its flagship Elizabeth Street property in Sydney would be used to service debts run up in Australia. “We believe that the cash position deteriorated to the point that Elizabeth Street had to be sold as the banks refused to lend any further to the business,” and that the suspension of lending covenants during Covid-19 was conditional on the sale, Salmon and Gilmour write.
- “We understand that even the large insurers stopped providing credit insurance to David Jones suppliers.”
- Woolworths did not respond to a request for comment from The Africa Report.
FHB lagged behind the food business in the year to the end of June, the company said last month. The company says that FHB has been hurt by a “constrained environment, the decline in demand for formalwear, as well as our initiatives to streamline our private label offerings and rationalise unproductive space.”
- Overall, the company posted sales growth of 9.7% for the financial year.
Marks & Spencer throwback
Visitors to Woolworths stores in South Africa could be forgiven for thinking they are in Marks & Spencer, the report says. The authors point to the historically close relationship between the two companies, which have shared suppliers, technology and branding strategies.
- Former Woolworths chairman Simon Susman has family connections to the M&S founding family and worked at M&S for 10 years.
- M&S has repeatedly changed its mind on the extent to which its format can be rolled out outside Britain.
- In 2016, it scaled back its international ambitions, pulling out of most of its foreign clothes markets. This year, M&S launched 46 e-commerce websites in new countries.
The M&S experience suggests that e-commerce rather than physical stores is the way forward for international retail brands in a Covid-19 world.
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