South Africa’s largest pharmaceutical manufacturer, Aspen Pharmacare, may have announced a relatively tepid set of annual results for the year ended 30 June 2019, but the anticipation of a reduced debt load freeing up cash flows pushed its share price up 12% the day after its results announcement.
South Africa: Woolworths vies with stale consumers and bad buys
Woolworths’ ambitious plan of stitching together “a leading southern hemisphere retailer” through the acquisition of David Jones is coming apart at the seams.
The Woolworths CEO Ian Moir is packing for Australia. But it is not for a holiday.
- He is travelling to deal with the costly fallout from the acquisition of retailer David Jones five years ago.
- That purchase forced Woolworths Holdings to write down the value of David Jones twice, in January 2018 and August 2019 respectively.
At the end of August, Woolworths reported its full-year results. Its South African operations remained mostly resilient while its Australian arm struggled.
In the year ended June 30 2019, Woolworths reported:
- An after-tax loss of R1.2bn (R3.5bn in 2018)
- A further A$437.4m write down of David Jones (following the A$712.5m in 2018)
- A significantly reduced dividend of 190.5c, down 20.3%.
Davy Jones’ locker
Back in 2014, Woolworths acquired David Jones for R21.5bn ($2bn) in a transaction Moir said would help the South African retailer “… deliver significant benefits to our shareholders”.
But Woolworths is not the only South African retailer to have made the costly mistake of buying troublesome international operations, according to Peter Takaendesa, a portfolio manager at Mergence Investment Managers.
“But … [Woolworths’] peers … cut their losses early by exiting underperforming assets while Woolworths has continued to defend its strategy and exposure,” Takaendesa said.
Debt not a problem, yet
There has also been suggestions that Woolworth carries too much debt.
Takaendesa puts this into perspective by pointing out that “… [Woolworths’] gearing is still far from the … [debilitating] levels that [competing retailer] Edcon got to.
- “Woolworths can reduce the dividend further … to de-gear its balance sheet. However, its Australian operations have a higher risk of breaching some covenants’ measures if operational performance remains weaker at David Jones and Country Road.”
Woolworths does have options to avoid getting into the Edcon trap, but “the board needs to move faster to de-risk the business,” according to Takaendesa.
- For Casparus Treurnicht, a portfolio manager at Gryphon Asset Management, although Woolworths “simply overpaid for David Jones at the top of the cycle. … The worst is behind.”
Treurnicht agrees with Takaendesa’s sentiments about Woolworths’ gearing levels. “I think the debt inside Woolworths is manageable … [unlike at] Edcon.”
Moment of reckoning
Woolworths has adopted a realistic but optimistic posture about the David Jones debacle.
Bloomberg reports Moir’s mea culpa – “I regret the price, and buying it at that time — hindsight is a wonderful thing — but I think we have a great asset now.”
- But he also declared the worst to be behind for the retailer.
Looking ahead, strategy and execution, as well as economic conditions, are the greatest risks facing Woolworths, according to both Takaendesa and Treurnicht.
“Woolworths is facing structural and cyclical headwinds in most of its key business and only the food retail business has been a star performer,” explained Takaendesa.
Improving execution on the South African clothing business and reducing exposure to Australia would go a long way in effecting a turnaround for the group.
“There is no easy way out, but we believe it is necessary for the board to focus its efforts more on those areas,” said Takaendesa.
- The weaker consumer environment added to Woolworths’ woes, too.
The South African department store chain must re-assess its business model should the country’s economy continue on its current low-growth trajectory, says Treurnicht.
In the South African context, consumers’ disposable incomes are under pressure.
That places low-cost clothing retailers Mr Price and Pep in a better strategic position, and Woolworths has to up its apparel game if it wants to compete, says Treurnicht.
Bottom line: Consumer-facing businesses in South Africa are being put to the test. Even small mistakes are proving costly in the current climate.