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Woolies Food has a bumper festive season

But its clothing and Australian divisions continue to struggle in the face of Covid-19.
Described as being ‘in a different league’, the group’s food stores continue to be popular. Image: Moneyweb

A trading update by retail giant Woolworths on Monday showed that its food division continues to be a star performer, growing sales by a remarkable 12% for the last six weeks of its half-year to December 27, 2020.

The six-week period is part of the festive season peak that includes Black Friday at the end of November and the December holidays.

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While food sales boomed on the back of more people staying home and eating in due to Covid-19, the pandemic continued to impact sales in the group’s fashion, beauty and home division (FBH), as well as its David Jones business in Australia.

It said its food business “remained resilient” throughout the six-month/26-week period, with sales growing 10.9%. Comparable store sales grew 9.4%, while it still managed to grow new store space by 0.4%.

The division’s 12% growth in the last six weeks of its half-year saw it gain further market share.

While Covid-19 continues to affect in-stores sales, the pandemic has boosted online sales for major retailers, with the Woolworths food division reporting 158.5% growth in online sales for the six-month period.

However, this is off a comparatively low base, with online food sales now contributing 2.2% to overall sales.

The group has expanded its online and click-and-collect offering in the face of the pandemic-induced demand for such services over the past year. It began piloting its new Woolies Dash on-demand or same-day grocery delivery service in select locations just before Christmas.

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Its FBH division saw sales declining 11.2% for the six-month period (comparable store sales down 11%, while sales at David Jones declined 8.8% largely driven by a lockdown in the state of Victoria in Australia).

The group however noted in its latest update that there was “improved trading momentum across all businesses over the final six weeks” of the half-year period. It did not provide divisional breakdowns for that period.

Overall group sales for the half-year increased by 5.3%, compared with the same period in 2019. Nevertheless, in “constant currency terms” sales declined by 0.5%.

“Trading conditions across the group continued to be impacted by Covid-19, with significantly reduced store footfall, particularly in larger shopping centres and CBD locations,” Woolworths noted.

“Considered actions to stimulate trade, strengthen online capabilities, manage inventory levels and execute property sales, have resulted in positive cash flows and a continued reduction in net debt levels in both South Africa and Australia,” it added.

On December 21, the group announced the sale of the David Jones Elizabeth Street property in Australia for around R5.6 billion. However, in its latest trading statement it points out that the sale will only be recognised in the second half of its financial year “once final approvals have been obtained”.

It noted that the sale is expected to “further strengthen the group’s balance sheet and ensure a more sustainable capital structure” of its Australian entities.

The stronger trading update saw the Woolworths’ share price surge almost 11% on Monday, closing at R44.72.

The group expects its half-year headline earnings per share (Heps) to increase by 50% to 60% when it releases its interim results on February 25.

While the better-than-expected trading performance has contributed to the increase in Heps, the biggest contribution seems to be coming from the sale of David Jones properties in Australia.

“The sale of the Bourke Street men’s property in David Jones was completed in the period, resulting in proceeds of Au$121 million [R1.4 billion] and a profit on sale of approximately A$23.5 million [R275 million].”

The group pointed out that Heps excludes the profit arising from the property sale, while adding that “the renegotiation of various David Jones leases resulted in lease modification and cancellation gains under IFRS 16 of approximately R667 million [pre-tax], which were recognised in the period”.

It said “adjusted diluted Heps” for the period is expected to be 17% to 22% higher. Adjusted diluted Heps calculations exclude both the Bourke Street sale and the lease modification gains cited above.

Surprising performance

Commenting on the trading update, Alec Abraham, an equity analyst at Sasfin Wealth, said he expected the retailer’s food division to do well but “not necessarily to accelerate” the way it did for the period.

“I believe Woolworths Food is in a different league, with the most appealing offering [and] store shopping experience, convenient locations and increasingly improving price perception,” he added.

Abraham said he was surprised by the better performance of the group’s other divisions in the last six weeks of its half-year.

“I initially thought that would come at the cost of margin. While my Heps expectation is at the top of the guidance range, I would have thought more margin would have to have been sacrificed to get those sales,” he noted.

“The share price reaction is due to the surprisingly strong last six weeks’ performance.

“I’m still quite surprised at the better-than-expected sales updates from all the [retail] groups that have announced recently because macro drivers of retail spending [credit extension, employment, real wages] are still poor,” he added. “Granted, some of these numbers are out of date, but anecdotally, in theory, I don’t see how they could improve.”

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They have good quality products, that is a fact. However, they are often out of stock.

what if higher sales is due to inflation and not more shoppers? crazy increases the last 2 months. many products more than 10% from October

As a 73-year-old SA consumer, it’s fascinating to have seen the shift in the consumer markets here. Decades ago Woolies didn’t sell food, but everyone middle to upper class bought their day-to-day clothes at OK Bazaars, especially for kids, and their better clothes at Woolies which had the UK M&S imported lines. Reliable quality and acceptable style.

Food was bought at P&P or OK Bazaars.

Truworths, Foschini, Markhams etc were the next level up for more stylish seasonal lines and then boutiques for exclusive lines.

OK Bazaars was sold for a Rand and the rest of the consumer market has wandered around in a maze of vaguely defined offerings except for Checkers Shoprite, Mr Price, and Pep which have pretty much stuck to what they know best.

Probably why the retailers on the JSE are a dodgy bet.

People have to eat, dress and wash regardless of the state of the economy. Retailers will always make money.

SHP makes more profit with higher food inflation.

Plus if there is someone that can negotiate better prices then it is SHP.

Woolies never imported M&S clothing lines. You are mistaking Princess (Woolies) for St Michaels (M&S).

Occasionally Woolies would stock festive season food items – but never clothing as it incurred heavy import duty. They never even combined volumes or used the same suppliers. All they did is engage with their “cousins” to ensure that what went into procuring quality product was instilled in local buying standards.

My aging memory failed me …;-) But my partner tells me that occasionally there would be M&S lines and everyone would rush to buy!

End of comments.

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