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Woolworths: From R10 to R38 in three years

Analyst still regard the share as a firm buy.

Orapa – Over the past three years, Woolworths has been an outstanding performer on the JSE. In October 2008 the retailer’s shares were trading at around R10. The share price has nearly quadrupled since then, with the stock currently changing hands at around R38 a share.

Much of this has been the influence of foreign investors who have been attracted to South African retailers by their quality management teams and very high yielding businesses relative to their peers in developed markets. However, the group has also grown earnings impressively in the unsteady market that has prevailed since the financial crisis. This is in no small part due to its unique positioning that combines high quality food and fashion retail.

“There’s a lot of risk in fashion retail if you get the fashion trends wrong, and Woolworths has experienced that in the past,” says Cadiz portfolio manager Warren Buys. “However, their food business definitely reduces this risk. Food is also generally more defensive, so it reduces the business’ cyclicality.”

Woolworths currently operates over 400 stores across its geographies of South Africa, Botswana, Kenya, Namibia, Ghana, Lesotho, Swaziland, Tanzania, Uganda, Mozambique, Zambia and Dubai. It is also present in Australia and New Zealand through its subsidiary Country Road.


The first Woolworths store opened its doors in Cape Town in 1931. Within the next few years, new stores were opened in Durban, Port Elizabeth and Johannesburg, as a countrywide expansion got underway.

A relationship with Britain’s Marks and Spencer was formed after the Second World War, which led to the London-based retailer buying all of the unissued share capital of Woolworths in 1947. This stake was later sold, but the companies still maintain close ties.

Woolworths merged with Truworths in 1981 to form the Wooltru Group. Over the next twenty years, the company underwent a transformation that significantly improved sales and profits, before it was partially unbundled from the group in 1997. Woolworths became fully independent again in 2001.

In 1998, Woolworths bought a controlling interest in Australian clothing and home merchandise retailer Country Road.


The total distribution (cash dividends and cash distributions) paid by Woolworths to its shareholders for the year ended 30 June 2011 was 143.5 cents per share. This was up from 105 cents per share in 2010, 85 cents per share in 2009 (discounting the special dividend of 95 cents per share paid out after the sale of a majority stake in its financial services business to Absa) and the 79 cents per share paid out in 2008.

The counter offers a dividend yield close to 3.6%.

Which funds hold this stock?

Woolworths is a top ten holding in two of South Africa’s best performing equity industrial funds over the last three to five years. Midway through 2010 it was largest holding in the Stanlib Industrial Fund at 8% of its portfolio, but the fund has since reduced its exposure to 6.4%. The Coronation Industrial Fund gives Woolworths a weighting of 4.4%.

Woolworths is also held by South Africa’s leading large cap equity fund, the Coronation Top 20 Fund. The fund increased the stock’s weighting from 2.1% to 4% over the course of 2010, but has since reduced it to 1.9%.

Three of the top five general equity funds have exposure to the counter. The Prudential Equity Fund gives Woolworths a weighting of 2.2%, while the Coronation Equity Fund holds 1.6% of its funds in the stock. The Kagiso Equity Alpha Fund bought into Woolworths at the start of 2011 and now gives it a weighting of 0.2%.

To see which funds are buying and selling the counter, visit Moneyweb’s Unit Trust Portfolio Tool.

Why would an individual consider investing in this company?

In a brand-conscious industry, Woolworths has developed a very strong and well-defined brand. In particular, it’s focus on organic produce and environmentally-sound business practices has placed it in a niche that is likely to become increasingly attractive.

“There are a lot of changes happening that are making environmental issues more important and more relevant for investors,” says Cadiz’s Buys. “That Woolworths have already recognise these issues and are already good corporate citizens is a strength for them. It will become a key criterion to take into account for investors going forward.”

In addition, the group has put in a lot of effort towards supporting and developing local suppliers. This is not only about earning gold stars in the good corporate citizen class – it makes sound business sense.

“This is a key advantage for the business, because in a lot of these markets it’s difficult to find good suppliers,” Buys notes. “Particularly in developing markets, it is important to secure and help develop suppliers, and Woolworths has done an excellent job of this.”

What risks does this company face?

Like all of its peers in the local environment, Woolworths has ambitions of expanding its operations in Africa beyond South Africa’s borders. While this is seen as the next growth frontier, the countries in the region all come with their own regulatory, taxation and land-ownership issues that have to be addressed on a case-for-case basis. This can significantly lengthen the time it takes to set up successful operations and subsequently delay returns on investments.

Woolworths also faces concerns at its Australian subsidiary, Country Road, where tough retail conditions prevail. The Australian and New Zealand markets remain suppressed and sales growth and margins there will remain under pressure in the short term.

The group also faces the risks borne by any fashion retailer. Anticipating fashions and managing stock to supply customers with the right mix of colours and sizes is a constant concern for the business. Getting this wrong not only leads to unsold stock, but also a loss of customer loyalty as shoppers look for more appealing fashion elsewhere.

Where does this company’s growth potential lie?

After a few years of slightly confused customer targeting, Woolworths has now better aligned all of its products – clothing, food and general merchandise – to appeal exclusively to the top-end of the customer spectrum. In the past, its clothing lines were generally aimed lower than its food offering, but more careful product selection should lead to improved cross-selling and higher customer loyalty. The group is also projecting the number of South Africans falling into the highest customer segments to increase steadily in coming years, which will translate into a larger target base.

The group is also focusing on efficiencies and cost reductions across its operations. Woolworths’ operating margin climbed as high as 9.9% for the 2007 financial year, before slipping to 6.9% in 2009 and 7.1% last year. However it jumped back to 8.7% over the last reporting period.

A large part of this improvement has been from its food business, which became the major contributor to group operating profit for the first time in the last six months of 2010. Woolworths has also been expanding the space assigned to food to increase sales. In addition, the group will launch the first of its supermarket stores in the coming year.

As part of its accelerating African expansion, the group also recently announced that it will be moving in to Nigeria by the end of 2011. In a move that mirrors what it has done in Tanzania and Zambia, Woolworths has entered into a joint venture (JV) with a local company to reduce the initial risk. In the Nigerian case, the JV is with Chellerams plc, which was involved in the successful entry of KFC into that market last year. This experience could well smooth some of the difficulties many companies have faced when setting up businesses in Africa’s most populous nation.

Overall, however, uncertain global economic conditions and continued strain on consumers both locally and in Australia will moderate Woolworths’ growth.

“In general, the outlook for local retailers is modest,” Buys believes. “With electricity tariffs going up and petrol price increases, there is pressure on consumers.”

For more, visit Moneyweb’s click-a-company profile on Woolworths Holdings Ltd.


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