Australian unit David Jones plunges Woolies into the red
The retailer says it will write down the value of David Jones by R6.9bn, admitting that it overpaid for it
Four years after finalising the R21.5bn acquisition of Australia’s David Jones department store, Woolworths is set to report its first annual loss since listing in 1997 as it struggles to bed down the acquisition, which in 2014 was described as “transformational”.
Woolworths said in January that it would write down the value of David Jones by R6.9bn, admitting that it had overpaid for it. The share price is down 18.6% since the start of 2018, lagging both the JSE’s all share and general retailers indices.
In 2014, Woolworths CEO Ian Moir said the David Jones purchase would create one of the leading retailers in the southern hemisphere, benefiting from an increased number of stores and concurrent fashion season.
“This is transformational for Woolworths. This will allow us to take market share from others, both in South Africa and Australia,” Moir said at the time.
One industry analyst, who did not want to be named, said the deal was done at the height of the Zuma years, when many South African companies were keen to acquire international assets. “It was supposed to counter the impact of deteriorating trading conditions at home as well as a weaker rand, but Woolworths has not been able to get the Australian business right and probably won’t ever.
“In addition, the exchange rate with the Australian dollar is currently at the same level it was in 2014, and trading conditions at home are difficult,” the analyst said.
In the trading update issued on Thursday, Woolworths said it faced “extremely challenging trading conditions in South Africa and Australia, as well as poor product execution in some areas of womanswear”.
Group sales for the 52 weeks ended June 24 were expected to increase only 1.6%, compared to the prior year, with David Jones sales down 0.9% for the year, Woolworths said. However, David Jones saw an improvement in the second half of the year, when sales rose 2.2%.
Key initiatives have been undertaken to improve the performance of David Jones, including the implementation of new inventory and online systems and the repositioning of the foods business, it said.
These initiatives had been “substantially completed” in the past financial year, it said, but warned that the A$200m refurbishment of the David Jones flagship branch in Sydney would continue to disrupt sales until December 2019.
The head of Woolworths’s Australian operations, John Dixon, was fired in May as part of restructuring attempts to fix the business.
Due to the write-off, Woolworths is expected to report a loss per share of between 340c and 396.7c for the financial year. Excluding the write-off, as it is for calculation of headline earnings, Woolworths will report earnings of between 336.7 to 357.8c a share. This is a drop of between 15% and 20% on the 420.9c reported for 2017.
Nedbank Private Wealth said the trading update was worse than expected but its view for the medium-term state of the business was more positive. It had a buy recommendation on the stock, saying it saw value on a three-year basis.
The strongest performer was Woolworths Food, which increased sales on a like-for-like basis 4.8%, with prices up 3.2%.
Sales at Woolworths Fashion, Beauty and Home were down 4.1% on a like-for-like basis.
Like-for-like sales at Country Road Group were down 1.8%. Online sales at Country Road, which account for 18% of total Country Road sales, grew 20%.