Woolworths stung by retail malaise in Australia

Food and clothing retailer Woolworths has been deepening its presence in Australia since 1998, when it bought Country Road.

But now that the retailer's Australian dream has been realised, the business does not appear to be delivering anticipated benefits.

Woolworths' Australian business, including David Jones and Country Road, accounted for 42% of operating profit, yet in the 26 weeks to December 25 2016 operating profit for David Jones increased by a marginal 1.9% to A$106-million (about R1.06-billion).

Ashraf Mohamed, chief investment officer at JM Busha, said the Australian operations' performance was "not inspiring, which will remain a major concern for the business".

Mohamed said when Woolworths went into Australia, it had created a significant expectation for the market, which is why it had received a premium rating relative to its peers, but "now reality is starting to bite".

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The first point of concern should be whether the South African business was expected to fund the group's expansion in Australia, he said.

But muted growth in South Africa and the general malaise that has infected Australia's retail sector has sent the stock sliding more than 30% since it peaked in November 2015.

Group CEO Ian Moirsaid on Thursday that the Australian business had been affected by a number of issues, including declining commodity prices.

However, he added that given the state of the retail environment in South Africa, "we've done better than other market players".

In the 26 weeks to December, Country Road sales were 0.9% lower than the prior period after adjusting for the Boxing Day sale, which shaved off 1.1%.

Sales from new acquisition Politix added 1.8% to Country Road sales.

In the same period, David Jones sales grew 4.0%.

Country Road had three difficult years, "but we are beginning to see green shoots ", Moir said.

"We have spent a lot of time in the business, bulking up in our planning and process to market."

Bright Khumalo, a portfolio manager at Vestact, said "some things don't happen overnight".

He added: "The integration of the Australian business with the South African business is going well as Woolworths is consolidating the staff.

"It is moving into one office space in Australia, meaning overheads will be better controlled.

"It's also easier to get synergy that way."

But Woolworths' woes are not confined to Australia.

On the local bourse, the stock has shed about 21% of its value over the past year.

This was because "the market was expecting poor results", Mohamed said.

"Woolworths is going to look at driving promotions in order to drive volumes, which tells you that things are not looking good."

Promotional activity and heavy discounting are becoming the new normal as retailers battle to drive sales.

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Moir said he anticipated that the heavy discounting environment is expected tocontinue.

He said consumers appeared to be relying on promotional activity which had been a concern.

But, unlike its peers, Woolworths had not discounted heavily, he said.

Truworths, which also released results for the six months to end December this week, reported that retail sales, excluding its UK-based brand Office, remained flat.

Khumalo said retailers were struggling to grow volumes in the tough trading environment.

"The consumer is cash-strapped, or they are being conservative in spending their money."

The introduction by Woolworths of high-end beauty brands - including Chanel, Estée Lauder, Bobbi Brown, La Mer and Clinique - into its South African stores would attract new customers and boost revenue, Khumalo said.

Mohamed cautioned: "If you look at the breakdown of Country Road or David Jones, it doesn't read as a business that's promising growth and that is a major concern."

tshandup@sundaytimes.co.za