Woolworths faces possible further S&P downgrade
The drop in profitability caused by the weak performances in Woolworths’ non-food businesses in Australia and SA prompted the downgrade
S&P Global Ratings said on Tuesday it could downgrade southern hemisphere retailer Woolworths again if its position in the nonfood markets in SA and Australia weakens further.
The ratings agency was commenting after announcing it had downgraded its rating on Woolworths from AA, which means it has a strong capacity to meet its financial commitments, to one notch below A+, which means the retailer has a strong capacity to meet its financial commitments but is susceptible to adverse economic conditions and changes in circumstances. On S&P’s scale BBB and above is investment grade.
The drop in profitability caused by the weak performances in Woolworths’ non-food businesses in Australia and SA prompted the downgrade.
"Woolworths Holdings continues to face challenging macroeconomic and trading conditions in SA and intense competitive pressure and structural changes in Australia," said the ratings agency.
Last month the retail chain, a favourite among upper-income consumers in SA, reported a R3.5bn annual after-tax loss after it was forced to write off R6.9bn against the carrying value of underperforming Australian retailer David Jones. Woolworths bought David Jones for R23.3bn in 2014 in a bid to escape the profit constraints in slow-growing SA.
But S&P also said it would consider an upgrade if margins improved notably on the back of a strong performance, a supportive consumer environment and a further reduction in the cost base.
Razeen Dinath, head of research at Warwick Asset Management, said it was not great to see any investment being downgraded but it was only a slight change.
"This doesn’t make a material difference and Woolworths still seems fine," said Dinath, adding it would only become serious if Woolworths lost its investment grade ranking.
S&P said Woolworths continues to face challenging economic and trading conditions in SA as well as intense competitive pressure and structural changes in Australia.
A Woolworths spokesperson said they were disappointed with the outcome of the annual review rating but it should be seen in the context cited by the ratings agency.
"We remain confident in our long-term strategies and [we] are focused on delivering sustainable improvements in our operating results."