What to expect in Woolies’ results

David Jones inclusion proves a sales saver.

Now one of the biggest retailers in the southern hemisphere, Woolworths Holdings is set to report interim results on February 12 2015.

The R21.4 billion acquisition of David Jones, through the combination of cash, debt and a rights issue was concluded August 1 2014 and the 26-week period will reflect the impact of the first five months’ of inclusion of the Australian retailer in the group’s earnings.

The magnitude of the David Jones newfound presence is highlighted by the impact on Woolworths’ group sales, which increased by 55.2%, a figure which is more than four time less with the omission of David Jones.

The newly acquired retailer did see a minor contraction in comparable store sales over the period, although the market will perhaps be more focused on the progress of the expected synergies within the group. In particular, how the lower cost sourcing benefits and higher margin products introduced within the David Jones stores have started to materialise for the Woolworths group.

The company recently released a 26-week trading statement for the period ending December 2014 which guided towards the following sales and retail space growth in the table below.

26 Weeks end December Growth  Net retail space growth
Group Sales 55.20%
Group Sales (excl David Jones)  12.50%
Food Sales 14.10% 10.70%
Food Same Store Sales 8.20%
Clothing Sales South Africa (incl Country Road) 9.40% 5.70%
Clothing Sales Comparable Store Sales 3.40%
David Jones Sales (5 months) 2.00% 5.40%
David Jones Comparable Store Sales -0.10%
Country Road (Aus & NZ) 8.20% 9%
Country Road Comparable Store Sales 5.30%
General Merchandise 8.30%
General Merchandise Comparable Store Sales 5.30%

The comparable sales growth rate (across most divisions) has slowed compared with growth rate recorded in the 2013 comparable period. Of particular importance may be the figure relating to the clothing department. Clothing combined with general merchandising, accounted for 44% of group profit for the year ending June 2014 and the diminished rate of growth is therefore likely to reduce the margins of profitability for Woolworths.

Turnover for the interim period is expected at R30.08 billion (including David Jones) while headline earnings per share is forecast at 401c per share reflecting growth of 11%. A Thompson’s Reuters poll of 12 analysts have an average rating of buy for Woolworths Holdings, with no sell recommendations.

The southern hemisphere jurisdictions, within which Woolworths operates, have seen slowing growth as well as a pressured consumer environment. The company’s issued guidance does however suggest a relative outperformance of locally listed retailers in the clothing and food departments.

The recent and severe decline in oil has improved the outlook for the retail sector on the suggestion that consumers may have improved purchasing power. Should the consumer cycle sustain the short-term turnaround, Woolworths finds itself well poised to be a beneficiary thereof.

This article was first published on IG here and republished with permission.

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