CHRIS GILMOUR: Woolworths could learn from Boxer spin-off

Woolies’ latest trading update was predictable insofar as it indicated a strong performance for foods but a poor performance from the rest of the business. It was also predictable in containing many excuses for the poor clothing performance, most relating to the state of the economy.

After the divestment from the disastrous David Jones department store chain in Australia, which destroyed so much shareholder value, one could be forgiven for assuming Woolies management would be looking to consolidate its position in SA and attempt to ensure the nonfood side of the business stopped acting as a drag on the overall group.

But that isn’t what has happened. While clothing retailers such as Mr Price and TFG are flourishing as SA consumers start buying again, Woolies’ clothing business languishes. And as if that weren’t bad enough, Woolies Foods now faces the spectre of proper, organised, strong, sustained local competition for the first time from a resurgent Checkers.

Group turnover and concession sales for the 26 weeks to December 29 increased 5.7%, and 6.2% on a constant currency basis. Woolies Foods had a knockout half, with sales rising 11.4% (7.3% on a comparable basis). It compares with sales growth of 13.5% for the same interim period at Checkers, which is directly comparable with Woolies Foods. 

Meanwhile, the clothing business only managed a 2.5% sales increase (2.7% comparable increase). Sales at Country Road declined 6.2% (7.8%). Headline earnings per share for the interim period are forecast to be down 22%-27%.

Woolworths used to be part of a larger retail group called Wooltru, which comprised Massmart and Truworths in addition to Woolies. Wooltru demerged the subsidiaries, as the synergies that management thought it could achieve were not being achieved. The group had outgrown itself. Investors wanted focused investment and the same still applies, hence the suggestion of splitting Woolies into food and nonfood.

There are no synergies and no rationale to keep the food business tied to a struggling quasi-department store in SA. Food and nonfood operate as separate entities within the group and have done for many years. Investors would probably value the food business higher if it were not encumbered by the rest of the companies within the group, from which it gains no synergies or benefit. 

A focused food retailer with the market positioning and customer profile of Woolworths Foods would become one of SA’s most highly rated retail companies. As top-line growth slows and cash generation increases, it could become a haven for investors in a low-growth economy, much the same as Clicks, which has the highest rating of any listed food & drug retailer. 

For as long as I have been monitoring Woolies, which is more than 40 years, the same predictable pattern of a great foods performance and a patchy clothing performance has been evident. Only occasionally does the nonfood side manage to display any degree of sustained improvement. Thus the rationale for a split into food and nonfood appears to be compelling. And now there’s a precedent of sorts on the JSE with the demerging of Boxer from Pick n Pay.

Admittedly the circumstances of that transaction were quite different, but Woolies would do well to take note of the end result. Pick n Pay has retained control of Boxer, which enjoys a premium rating on the JSE, while management is able to focus on turning the ailing “mother brand” around. Woolies could easily do a similar thing with its foods business.

As Woolies Foods and nonfoods have operated autonomously for decades, a physical separation could easily be achieved, at least in theory. But this is not a new suggestion and successive legions of Woolies management have dismissed the idea as they believe (erroneously in my opinion) that synergies exist in a hybrid food and nonfood operation.

• Gilmour is an investment analyst.