Woolworths CEO Ian Moir discusses half-year results, which show pressure on a number of fronts, and why he has maintained the dividend in tight times.

Ian Moir. Picture: SUPPLIED
Ian Moir. Picture: SUPPLIED

Ian Moir is Woolworths CEO.

BUSINESS DAY TV: Woolworths’ first-half results are a far cry from recent years’ performances, with the retailer posting a drop of 4.3% in headline earnings per share (HEPS), a 6.7% rise in turnover and return on equity of just under 23%. It’s held the dividend though at 133c and joining me now on the line is CEO Ian Moir.

Ian ... to what extent were the results a reflection of maybe some bad fashion offerings that Woolworths has had over the first half and to what extent simply a stressed consumer environment?

IAN MOIR: I would say it’s more due to the stressed environment and the reason I say that is we’re taking market share both in clothing and in foods. So I think we’re doing the right thing by our consumers, our prices were good, competitive offering, our clothing business was fashionable and well-priced and our food business went from strength to strength, it’s a good offer and we improved our values.

We invested more in price, in everyday low prices as opposed to promotional activity. So to take market share in a tough market is the best you can hope for and as a business you’ve just got to trade through this economic downturn.

That said you always need to look to yourself and have you made mistakes, and one always will, particularly with our fashion ranges from time to time, but there’s nothing that’s a big call-out for me this time that have me believe or cause me to say that we got things wrong in SA.

BDTV: Okay, so you’re talking about SA, what about Australia though, because you did also refer to promotional activity that you’ve never seen the like of and you also, I believe, spoke to the analysts this morning and said you got it wrong with the private label brands at David Jones, was that a different scenario?

IM: It’s yes and no, and I mean both are constrained environments, growth is lower and the consumer confidence is low. It was very promotional in clothing within Australia and now in part that came out through the very warm winter, stock levels high and discounting levels high. But also as seen in promotional because of the amount of international retailers that are coming in.

I think we’re going to see a lot of change in that market. We’d always said that, we’ve been saying that for four years and I think there’ll be a lot of rationalisation. We’re seeing some businesses going out of business and other businesses which have always traded well in the past are really struggling. So against the backdrop of real promotional activity and a constrained and less confident consumer, I think our David Jones result of 4% up was a good one.

We actually managed to improve our margin there and the disappointment, particularly in the first quarter, was Country Road, that really didn’t perform. But if I have a look at that business a lot of change, long-term and short-term changes, both to people and to process, product looking a lot better and now beginning to trade better. So for me that was the one business that seriously underperformed but is now back to performing.

BDTV: I hate to say this, but I shop at Woolworths, I love Country Road and Trenery, or at least I used to, and I find, and I don’t think I’m the only one, who just can’t seem to find clothes that I want to buy anymore, and I wonder if you guys are being able to defend yourselves against entrants like H&M and Zara? Do you have to up your game?

IM: I think everybody has to up their game and we’ve always said that, we need more fashionability and that’s not just Country Road, Trenery it’s the whole WHL business and we’ll be focused on that. If I have a look at the Country Road business in SA, the trading in the last two or three months of those businesses in SA, have been very strong indeed. So fortunately not everybody, there are some people who are finding appeal in that offer.

But that is not to say we can’t improve the fashionability and we have to keep focused on that, we do. These guys, they’re not necessarily big players in this market yet, but what they’ve done is change people’s expectations of fashion and we’ve got to live up to that.

BDTV: As far as Australia is concerned, because I don’t know if this is the perception at least, is that the money and the capex (capital expenditure) is going to spent in Australia, bringing in the food line into David Jones. There seems to be a fair amount of capex that you’ve got planned, can you just ... in total how much is Woolworths going to be spending on its Australian business in the next six months or 18 months?

IM: We will be spending a lot of capital there but it’s not constraining our capital spend elsewhere. So the fact that we’re spending capital there doesn’t prevent us from building a business and spending the capital that we need in this marketplace. We’re very committed and this is a very profitable and fast-growing part of our business. It’s still the larger part of our business is in SA, it’s just that we bought David Jones and we said that we’d transform it.

And to transform that business requires a lot of capital spend. We’re in the middle of major system transformation, our merchandise planning systems, finance systems, our online platforms are all being changed.

We’ve sold one four biggest stores in Sydney and we’re consolidating into the other. We sold for A$360m, made a profit of A$170m and a lot of that money will, or some of that money up to A$170m, will go back into creating the most amazing store, a mix of food and fashion within Sydney. But we balance our capital spend and we allocate our capital in accordance to where we’re going to get the best return from it.

BDTV: So where do you think you will get the best return?

IM: I think it will be balanced ... the spend that we’ve identified are things I’ve just talked about. Those are the big spends in Australia, so I don’t foresee the capital increasing over time. What we’ll see is, we’ll get over that hump and then we’ll see the capital spend reduce within Australia and if our hurdles are set appropriately for each market and each market has to make the appropriate return on investment assessed against their weighted average cost of capital in each of those markets. And some projects will be better in SA than in Australia and vice versa.

BDTV: And Ian, just very quickly, your return on equity has been dipping in the last couple of reporting periods, 22.8% this time around, is it likely to continue to decline?

IM: No I don’t think so. What you’ve seen with ... we are moving in the last couple of years, is a function of the goodwill. Goodwill has come onto our balance sheet as a result of the acquisitions that we’ve made and so it’s more of a structural change because of that goodwill. And having made that we shouldn’t see that decline over time.

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