Woolworths published a trading statement on Thursday to warn shareholders that further adjustments to the value of its ill-fated investment in David Jones were necessary in the financial results for the year to June 2019. Provisions to the value of nearly A$460 million will be included in the results to be published towards the end of the month.
The write-down includes an impairment charge of A$437.4 million due to the bad performance of the Australian business and an additional provision for onerous leases on some of the stores amounting to A$22 million. Management says the impairment is due to economic headwinds affecting the Australian retail sector as well as the performance of the David Jones chain.
The latest adjustment to the valuation cuts the value of David Jones to A$965 million compared to the A$2.1 billion Woolworths paid for the chain in 2014.
The trading statement says the Woolworths board of directors believes this valuation of David Jones is realistic and reflects the group’s prospects.
The latest trading statement reiterates what Woolworths management said in a trading update a few weeks ago. At the beginning of June, Woolworths warned shareholders that retail conditions at both David Jones and Country Road remained challenging.
A look at Australia’s economic performance and outlook explains why. Economic growth declined to less than 0.5% annualised during the last few quarters, compared to 1% a year or so ago. In addition, data shows that the biggest culprit impacting on economic growth has been lower consumer spending.
Management also warned shareholders in the earlier trading update that sales at David Jones had been impacted by a major refurbishment at one of its flagship stores, as well as paying rent on unproductive space.
However, things are not that bad. The latest update shows that Woolworths Holdings’ group headline earnings per share (EPS) are expected to be just a bit worse than in the previous year. The trading statement tells shareholders that headline EPS will be in the ‘2.5% lower or 2.5% higher’ range in the year to June 2019.
It seems a credible performance in SA made up for the weakness in Australia. Woolworths disclosed in its June 11 update that things improved in the second six months of the financial year since it announced its results for the half-year.
The sale of fashion, beauty and home products increased 5.5% in the second six months while food sales increased by a very credible 9%. Management said then that it had focused on improving product range and sales volumes while limiting expansion in floor space.
The reason for the publication of the trading statement for the year to June is that earnings per share differs more than the 20% rule imposed by the JSE, which requires an update to shareholders. In Woolworths’ case, the EPS figure improves by between 65% and 75%. But it still shows a loss of between 92 cents and 129 cents per share compared to the loss of nearly 370 cents per share in the previous year.
The market did not react much to the trading statement as the problems and prospects of Woolworths are well known.
The share shed 0.5% to R54.70 after the Sens announcement.
The current share price is about 50% lower than the high of R108 in 2016. In reality, the share fell even further in investors’ standing as it fell much faster than earnings.
The 2016 high of R108 reflected a price-to-earnings (PE) ratio of more than 23 times compared to the current PE of 15 on the expected headline EPS of R3.46.
Investors are bound to read the coming set of results critically, looking for signs that things will start to improve in Australia, with a bit of improvement from South Africa as well.