Is Woolworths unravelling in Australia?
The long list of key resignations raises the prospect of further write-downs and more boardroom changes
The sudden departure of two Australia-based nonexecutive directors of Woolworths has fuelled speculation that the troubled retailer will be forced to announce another huge write-down related to the R21bn acquisition of the David Jones department store.
And while the board has reiterated its faith in CEO Ian Moir, the scale of the problems now facing the group and Moir’s evident inability to fix them suggest that further boardroom changes could be on the cards. Long-term chair and former CEO Simon Susman, regarded as an ally of Moir and a driver of the David Jones acquisition, is due to retire in November, to be replaced by deputy chair Hubert Brody.
The curt announcement of the resignation of the two directors pushed the share price down to a five-year low of R45.80. At the time of writing the share is at less than half the level where it peaked in late 2015 on the back of expectations about the contribution from the Australian business.
Asief Mohamed, chief investment officer at Aeon Investment Management, says he feels a bit shell-shocked by the constant flow of bad news from the company. "It is worrying that the only two Australia-based nonexecutive directors have resigned; there probably will be another write-down."
Earlier this week the board told the FM it "remains confident that Ian is best placed to deliver the turnaround strategy" and that it "continues to support him and the executive leadership team, which is highly experienced and keenly focused on the transformation and growth" of the business. Woolworths said it is working hard to deliver growth and innovation amid tough retail conditions. It does not expect to make any further David Jones-related impairments "at this time".
Adding to shareholder woes is that Christo Claassen, MD of Woolworths SA’s struggling clothing and textiles division, is also on the disturbingly long list of key people who have recently left the group. Claassen, who joined Woolworths in 2014, left in September 2018 and has not yet been replaced. His responsibilities have been assumed by Charmaine Huet until Manie Maritz joins in 2020.
Unlike Claassen’s departure, which few outside the company seemed to know about, his appointment was announced with much fanfare. He was tasked with turning around the troubled clothing division and was thought to have made some early progress, albeit tentative, in extremely competitive market conditions.
However, more recent results revealed that the group’s SA clothing operations were still struggling. "Christo is an excellent strategist, but I’m not sure about his merchandising skills," remarked one analyst after the financial 2018 results revealed weak performance in the SA fashion business.
The 2018 results were particularly hard hit by the first-half write-off of just over R7bn of the book value of the 2014 David Jones acquisition, causing Woolworths to record its first ever loss as a listed company. At the time of the group results, Moir, who championed the pricey David Jones acquisition, said management was starting to see the benefits of the restructuring, which included a A$200m refurbishment of its flagship in Sydney’s CBD.
However, one industry analyst who has just returned from Australia tells the FM there is no indication that any of the resources pumped into David Jones in the past two years are having an impact on local shoppers.
"David Jones’s traditional customer is now shopping in the suburbs, not the CBD, where most of [the company’s] stores are," he says, adding that the current CBD shopper shows little interest in the David Jones department-store format, no matter how many bells and whistles are added.
The dramatic resignation of SA-born banker Gail Kelly and Australian retailer Patrick Allaway brings to three the number of high-profile people to leave the troubled retailer in less than a week. South Africans who knew Kelly, a former Nedbank executive, say she would not have taken the decision to abandon ship lightly.
David Thomas, who was appointed CEO of David Jones in 2017, announced his resignation days before. He was the third CEO appointed to David Jones since 2014, when Woolworths finalised the deal that was going to make it the largest retailer in the southern hemisphere. Moir has taken up the reins at David Jones until a replacement is found for Thomas. At the time Thomas took over the top slot at David Jones, Woolworths appointed the former CEO John Dixon to the newly created position of CEO for Australasia. Nine months later, after a "strategic cost review", that position was scrapped.
Sasfin’s Alec Abraham says the executive churn reinforces his below-market expectations for earnings growth over the next few years. "Apart from the SA food division there have been no steady improvements from any divisions in the group; sometimes things go better in one half and then stumble the next. I’m still quite worried."
Abraham is forecasting a 6% earnings decline in 2019 followed by a 10% increase in 2020. That compares with the consensus forecast of a 4.9% rise and a 12.3% increase respectively.
More worrying is that Abraham’s rather grim near term forecast doesn’t even include the impact of a possible further write-down on David Jones.