NOMPU SIZIBA: Retailer Woolworths today announced that two of its non-executive directors have resigned with immediate effect. The announcement follows the resignation of Woolworths’ Australian based company CEO, David Thomas last week. The retailer is also facing some flak around allegations that it has plagiarised a certain type of coffee. This comes not too long after the firm took a baby-carrier range off its shelves after an entrepreneur claimed that Woolworths had copied her design to a T.
It’s been a torrid time for Woolies since it bought David Jones in 2014. To take a look at how Woolworths is really doing, I’m joined on the line by Brian Thomas, who is a portfolio manager at Laurium Capital.
Brian, significant players have left the Woolworths board. And then there is the David Jones CEO who left the other week – on Thursday, I think it was. It all seems very sudden and there is no notice being served by any of these individuals. Do you smell something fishy going on, or could it all just be a coincidence?
BRIAN THOMAS: Good evening, Nompu. I think the best case is that it’s just a coincidence that they resigned at the same time. As you said, David Thomas has been a very little standing member of the Woolworths Group. Woolworths bought into David Jones in 2014. David Thomas stepped down on Thursday.
And then you referred to two non-executive directors, Gail Kelly and Patrick Allaway, who are both Australian and very highly regarded Australian-market individuals. They stepped down as non-executive directors today. Now, no background has been given by the company on any of the resignations. We do know that Woolworths reports the results on February 21, so that’s not to far– 10 days from where we are now. I’d imagine that at that time they will give us more information as to what has happened and, further, the plan to replace the individuals who have left that business.
NOMPU SIZIBA: I see that Ian Moir, the current CEO of Woolworths, is going to be taking the reins as CEO at David Jones. When is that happening, exactly? Is that at the same time that he is CEO of Woolworths?
BRIAN THOMAS: Yes, I think so. That is the plan at the moment. It seems that Ian will play a far more active role now that David Thomas has stepped down. But the announcement said that they were looking to find a replacement. It’s obviously a very big job for Ian to look after the whole of Woolworths and David Jones, which in itself is a large business and a business that frankly has not performed as well as we as South African investors in Woolworths would have hoped since its acquisition in 2014.
NOMPU SIZIBA: Given what you’ve just outlined, the hugeness of both companies, one would have thought that there would be some sort of succession plan. But it would seem as though David Thomas, the CEO at David Jones, had to leave all of a sudden.
BRIAN THOMAS: One of the things I thought was that David Thomas – over time, not immediately – could have been successor to Ian Moir at some point in time. So yes, there is lot to go on at Woolworths.
You would also know that there are some planned changes to the board of directors later on this year. It’s been announced that Hubert Brody, who is the deputy chairman at the moment, will be moving into I think the chairman role if he is elected as such at the AGM. It normally takes place in the third or fourth quarter of the year. So there is a lot of change in various levels at Woolworths, which is never ideal. What one wants to see is consistency of the board, consistency of management. That’s generally what drives the results for all companies, not only retailers.
NOMPU SIZIBA: Absolutely. So we know that much of Woolies’ problems stem from their apparel. What have their problems been exactly, and to what extent have the likes of Zara, Cotton On – and even our local stores like Mr Price and Jet – disrupted the retailer’s fortunes?
BRIAN THOMAS: Let’s separate the Australian business from the South African business for now. In the South African business everyone will appreciate there is effectively the food business and then there is the clothing business. The food business has been an incredible performer over time and ultimately we believe will be a very good performer over time.
The clothing business has been one that has suffered various misfortunes in South Africa. It is primarily around women’s clothing where the missteps have been made, probably mainly over the past 24 months or so. I’m not a fashion guru myself, but I understand that some of the big mistakes that they made were in going “too fashionable”. The clothing cuts that they had in their stores for the target market that they were aiming at were too short, and just not the right fashion for the target market, which is kind of the woman from 25 to 35 or 40. That just wasn’t appropriate. What they are doing at the moment – and, as I say, I qualify this by saying I’m no fashion expert, but I certainly see it in my local Woolworths – is they are very much going back to the basics, back to basic T-shirts, the basic stuff that everyone in that age category will be prepared to wear. When you do that, you do start to compete head-on with a number of the other retailers in the space. You mentioned some of them.
But another big one that has cropped up of late is Pick n Pay Clothing, which is very competent in that basic space. And many of the international guys which you spoke of – I think if anything they came in with a big bang and everyone rushed off to H&M, Zara and so forth – those have probably fallen back a little over the course of the past year or so. So the initial market share gains have been given up, and you are starting to see the locals taking a bit of market share again.
So there is potential in South Africa for Woolworths to turn that clothing business around very strongly if they get the basics right.
NOMPU SIZIBA: Let’s switch to Australia very quickly, before we come back to South Africa. Woolworths made that investment in David Jones – I think it was some R21.4 billion in 2014, a massive amount. Last year they made an announcement to the market that they were having to write off some R7 billion in relation to David Jones. As maybe an investor in Woolworths, what is the feeling about David Jones, and then about staying with David Jones?
BRIAN THOMAS: That’s the million-dollar question, or the [A]$21 billion question. It’s been a business that has frankly underperformed. For those who don’t know what David Jones looks like, it’s a department store model. The have 40-odd department stores, and one or two very big department stores in various cities in Australia. The department-store model itself is under a bit of a question globally.
If you think of an online retailer, Amazon or Takelot.com, with which you and I are familiar in South Africa, it is really that the quintessential online department stores has multiple departments, and the motivation for individuals to go into a department store is probably not what it was, let’s say, eight to ten years ago.
So what David Jones is trying to do is to re-invent the concept of the flagship store, the very big store. They’ve spent a huge amount of money already on a store in Elizabeth Street in Sydney, which is going to contain a whole lot of the brands and things that you wouldn’t normally want to buy online. It’s backing that strategy that one needs to believe in, if you believe in the turnaround of David Jones in Australia. So it’s one concept; it has a long way to go. At some point in time there has to be a risk of further write-downs of that massive investment, given the profitability of David Jones at the moment. I’m sure that we’ll hear more detail as to whether there might be the need to write that investment down further or not in their results. So it’s not something that’s in my base case, but it’s something that is not inconceivable.
NOMPU SIZIBA: Brian, Woolies has lost some 30% since it bought into David Jones in 2014. Are we optimistic? Can we be optimistic – depending as well on what happens with David Jones – that it can recoup those losses in the share price in the near future?
BRIAN THOMAS: All of the retailers in South Africa, particularly the clothing retailers, have had a tough time of late. There are not many that one can point to as being massive successes in terms of share-price returns. The earnings of a number of these companies have been under significant pressure, and really it’s a function of the very weak consumer in South Africa. I certainly feel, and I’m sure you do, that there is not a lot of extra money in the pocket at the end of the month, and that is translating to very stagnant sales by the retailers. Up to now the retailers across the board in South Africa in my opinion have done a very good job at working on the cost line. So they’ve been able to still generate small amounts of profit growth by containing the costs. I’m not talking about the cost of the goods that they are selling, but the other costs – the rentals that they are paying, the staff that they are paying, and so on. That has been able to generate some profit and earnings growth for them over time.
Laurium Capital’s current feeling on this one is that they are starting to run out of a bit of road on that cost lever. There is a little more that they can do with the landlords, but not a whole lot more they can do with the staff costs. As a result, your earnings growth is going to be fairly stagnant in a lot of the clothing retailers for some time. As you know, it’s earnings growth that drives share-price growth, so we need to see earnings growth coming back. What will really drive that is consumer confidence, more people in the shops buying more, driving the top line, the sales line, which eventually will lead to the profits.
So we look for a big turnaround in the fortunes of retailers in general, including the clothing and food retailers in South Africa. You need a turnaround in that top line now.
NOMPU SIZIBA: Our thanks to Brian Thomas of Laurium Capital