Picture: SUPPLIED
Picture: SUPPLIED

Shares in Woolworths have rebounded in recent weeks, thanks to a recovery in the sector and optimism that the worst may be over for the high-end retailer, whose foray into Australia has proven costly for investors.

Despite the rally, Woolworths’s shares remain more than 50% below the highs of over R100 seen in 2015, soon after it finalised the acquisition of Australian department store chain David Jones.

The company, led by Ian Moir since 2010, has written down the value of David Jones by as much as A$713m (about R7.3bn), having paid about R21.5bn for it in 2014, and has cut head office jobs there in a bid to stabilise the chain.

Announcing the David Jones write-down in early 2018, Woolworths said the business had been hurt by the “cyclical downturn and structural changes” affecting Australia’s retail sector, and “poor or delayed execution” on major projects.

But analysts say the resulting share decline appears to have been arrested at the least.

Since dipping to a low of R43.05 in February — the worst level in seven years — “the share has been holding up well”, said Lester Davids, a trading desk analyst at Unum Capital. 

After edging slightly higher from February, the stock has led a broader relief rally among South African retailers over the past two weeks, lifting 11.5% since May 29 to R48.91 on Wednesday afternoon. The retail index has advanced 9% over the same time and the JSE all-share 7.6%.

“It does appear that the market continues to support the share above the R44 level, most likely continuing to believe that the business will find its footing after a tough three years,” Davids said.

To turn the company around in the face of rising competition from online players, David Jones has been adding food halls to its stores and investing as much as A$200m (R2.06bn) in its flagship store in Sydney, using funds from the sale of another outlet.

“David Jones has undergone a significant period of transformation and investment,” a Woolworths spokesperson told Business Day this week, asking not to be named.

“The bulk of the heavy lifting has now been done,” the person said, citing new systems and processes, a new online platform that “is trading well”, the addition of new brands, the flagship store refurbishment project, and the relocation of the chain’s head office with “a new and fresh team”.

“David Jones is now well positioned and we expect performance will benefit as the business moves out of the transformation phase to deploy its new capabilities.

“The executive team, with Ian, is committed and focused to leverage off the solid platform we have established for the future growth of our business.”

But Davids said Woolworths’s share price — which was probably being capped by tough trading conditions in SA — could “reverse its downward trend from bearish to bullish” if investor confidence returns to SA.

Investment manager Allan Gray has been building up its Woolworths stake in recent months because the stock has been trading at a discount, said Andrew Lapping, Allan Gray’s chief investment officer.

Despite the recent retail rally on the JSE, “we still think it’s cheap”, Lapping said.

For now, other investors are comfortable to simply hold the stock.

“We don’t think now is the right time to sell,” local money manager Vestact said in a note to clients last week.  “The bad news is priced in and they still can turn that Australian business around. If the South African economy turns, both Woolies and Mr Price will enjoy solid gains in sales.”

The Woolworths spokesperson said the company’s foods business in SA “continues to deliver good growth” while the fashion unit, which recently decided to drop the David Jones brand in SA, had started to show an improvement in the current six-month period to end-June.

US bank JPMorgan, which sees Woolworths shares rising to R57 by January 2020, said in a research note in February the clothing business in SA was likely to continue improving.

“We are now comfortable with three of Woolworths’s four businesses,” the bank said, adding that the stock was cheap.  “However, David Jones continues to be a meaningful risk given slowing Australian clothing, footwear and accessory sales, and execution problems.”

hedleyn@businesslive.co.za