Woolworths releases interim financial results for 2020/2021

The first half of the 2021 financial year continued to be affected by Covid-19, with significantly reduced store footfall, particularly in larger shopping centres and CBD locations. Actions to stimulate trade, strengthen online capabilities, protect margins through cost containment, tight inventory management, and government support measures, resulted in a 24.6% adjusted profit-before-tax growth for the half.

A focus over the period has been the strengthening of the group’s balance sheet. Through cash generation and preservation initiatives, and the execution of property sales, the group has improved its liquidity position and significantly reduced net debt levels in both SA and Australia.

The sale of the David Jones Elizabeth Street property in the second half will strengthen the group’s balance sheet and ensure a more sustainable capital structure of its Australian entities.

Commentary on performance

Group sales for the 26 weeks ended December 27 2020 (current period) increased by 5.3% compared with the 26 weeks ended December 29 2019 (prior period) and declined by 0.5% in constant currency terms. This reflects improved trading momentum across all businesses over the final six weeks of the reporting period.

The group results have been positively affected by the following transactions:

• the sale of the Bourke Street Mens property in David Jones was completed in the period, resulting in proceeds of A$121m and a profit on sale of A$23.5m; and
• the renegotiation of various leases resulted in lease exit and modification gains under IFRS 16 of R667m (pre-tax), which were recognised in the current period.

Earnings per share (EPS), which includes both the aforementioned items, increased by 76.0% to 288.8c per share, whereas headline EPS, which excludes the profit arising on the property sale, increased by 58.3% to 261.1c per share.

Adjusted diluted HEPS, which excludes both the aforementioned items, increased by 19.4% to 193.7c per share. Consistent with the prior year, where an adjustment was made for the non-recognition of deferred tax assets on assessed tax losses in David Jones, the taxation benefit arising on the partial use of these tax losses in the current period was excluded in calculating the adjusted diluted HEPS.

SA

SA’s weak macro environment and consumer confidence were worsened by the second wave of Covid-19, placing further strain on consumer discretionary spend.

Woolworths Food

Woolworths Food remained resilient throughout the reporting period, delivering further volume and market share gains, driven by innovation, convenience, and the focused price investment strategy. Sales over the 26-week period grew by 10.9% and by 9.4% in comparable stores, with net space growth of 0.4%. Online sales grew by 158.5%, contributing 2.2% to sales, with the expansion of delivery options. Price movement was 7.1%, impacted by mix, while underlying product inflation averaged 4.8% over the period.

Gross profit margin of 24.8% was 0.2% higher than the prior period, notwithstanding further price investment, due to higher rebates, improved waste and distribution cost efficiencies. Expenses, including additional Covid-19-related costs, grew by 6.7%. Adjusted operating profit increased by 23.2% to R1.531bn, returning an operating margin of 8.2% for the half.

Woolworths Fashion, Beauty and Home (FBH)

While FBH has begun repositioning its fashion business, performance remains disappointing, with sales declining by 11.2% over the period, and comparable store sales 11% lower on a 2.4% price movement. Online sales grew by 118.8%, contributing 4% to SA sales. Net space was reduced by 1.9%, in line with our focus on improving store operating efficiency.

Gross profit margin decreased by 0.7% to 45.9% as a result of increased promotions and price investment, together with higher clearance in December. Expenses were well controlled, declining by 1.6%, notwithstanding additional Covid-19-related costs. Adjusted operating profit decreased by 39.9% to R582m, resulting in an operating margin of 9.1% for the half.

Woolworths Financial Services (WFS)

The WFS book reflected year-on-year contraction of 2.2% at the end of December 2020. The annualised impairment rate for the six months ended December 31 2020 was 4.1%, compared with 3.3% for the previous period. The focus on customer collections and payment relief initiatives and the timing thereof, reflects in the shape of the book and the impairment rate for the period.

AUSTRALIA AND NEW ZEALAND

Early expectations of a recovery in Australia were short-lived, with the imposition of the stage 4 lockdown in the State of Victoria from August 6 to October 28, resulting in unplanned store closures. While this negatively affected sales for the half, the subsequent easing of Covid-19 restrictions, and the impact of government support on consumer discretionary spend, successful Black Friday and Cyber Monday campaigns, and further growth in online sales, contributed to an improved sales performance in the last six weeks of the reporting period.

David Jones (DJ)

DJ sales over the 26-week period declined by 8.8% and by 10.5% in comparable stores. Excluding Victorian stores, which traded significantly down on the prior period due to the extended lockdown, the balance of the DJ business, including online, grew by 5.9%. Online sales increased by 55.5%, contributing 17.7% to total sales over the half.

Gross profit margin was 0.3% lower than the prior period, at 34.8%, due to higher online fulfilment costs and a higher mix of lower-margin sales, which offset reduced markdowns and promotions. Expenses were 14.9% lower than the prior period, benefitting from government support and rent relief and the cost-out initiatives implemented to mitigate the impact of the loss of trade. The space reduction, including the exit from Market Street, contributed further to the cost reduction. Adjusted operating profit of A$56m was 33.3% up on the prior period, resulting in an operating margin of 5.2%.

Country Road Group (CRG)

CRG delivered strong sales growth of 6.7% in the last six weeks of the current period, underpinned by new product ranges, particularly in the Country Road business. Sales over the half declined by 5.2% and by 2.4% in comparable stores, negatively impacted by the lockdown in Victoria and in CBD and airport stores. Excluding the Victorian stores, the balance of the CRG business, including online, grew by 8.2%. Online sales increased by 52.5% and contributed 31.6% to total sales for the period.

Gross profit margin declined by 2.3% to 60% due to the impact of weaker exchange rates and additional online fulfilment costs, which were partially offset by the gains from higher full-priced sales. Expenses for the period reduced by 21.5%, mainly from store closures and a reduction in discretionary spend, as well as the benefits from government support and rent relief. Adjusted operating profit increased by 44.6% to A$94m, resulting in an operating margin of 18.4%.

Outlook

The trading environment is challenging and uncertain and is expected to remain so throughout the second half of the year. The economic outlook for SA is bleak, with the consumer under significant strain, and the possibility of further waves of infection and delays in the rollout of vaccines likely to further worsen the pressure on discretionary spend.

In Australia, economic fundamentals are stronger and more supportive of an earlier recovery in economic activity, but we are mindful that government initiatives, which have buoyed consumer spend, are coming to an end. As previously advised, the group expects to conclude the sale of the Elizabeth Street property in the second half of the financial year, the proceeds of which will be used to settle debt and further strengthen the balance sheet.

While Woolworths is pleased with some of the progress that we have made to date, it remains steadfastly focused on the other elements of its strategic priorities, including the repositioning of FBH, maintaining leadership position in food, real estate optimisation efforts in David Jones and driving growth through digital, online and data.

The board remains of the view that, while the group has made significant progress on its capital plan, it’s in the best interests of the company for distributions to WHL shareholders to remain suspended, given the impact and uncertainty of Covid-19. The company has therefore not declared an interim dividend in respect of this reporting period.

Any reference to future financial performance included in this statement has not been reviewed or reported on by the group’s external auditors and does not constitute an earnings forecast.

Appointment of debt officer

As previously advised on the JSE Stock Exchange News Service, Ian Thompson, in his capacity as the group head of treasury and tax of WHL, was appointed as the debt officer of WHL with effect from  November 1 2020.

This article was paid for by Woolworths.