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Woolworths is still facing many battles

A poor trading update underscores its woes in SA and Australia.

Shares of Woolworths sunk by nearly 9% on Monday morning after posting a poor trading update underscoring its many woes in SA and Australia.

Woolworths said its interim headline earnings per share for the 26 weeks to December 24, 2017, was expected to fall as much as 17.5%.

Its shares fell from R63.35 at 9:08 to R58 at 9:20 and finished 5.5% lower to R59.85 on Monday. 

Staying resilient during uncertain times was once Woolworths’ hallmark, making it a darling in SA’s retail sector.

However, Woolworths is now facing many battles: an intensified war with its competitors via aggressive promotions for market share, SA’s ailing economy and the problem of burning cash as a result of the slow turnaround of its Australian business David Jones.

Woolworths’ group sales increased by 2.5% over the period under review, which failed to keep in line with inflation.

The star performer was Woolworths Food sales, which increased by 9.4%, while comparable store sales (excluding new stores opened) grew by 5.3%. Stripping out its internal food inflation of 4.4%, sales volumes advanced by 5%.

Woolworths’ fashion, beauty and home remain problematic, as sales decreased by 0.2%. The decline is exacerbated when a price inflation of 0.7% is factored in. Comparable stores sales in the business were 3.4% lower.

Woolworths is also facing pressure in Australia. Its Australian department store chain, David Jones, reported a 3.8% decline in total sales. Since Woolworths completed its ambitious R22 billion acquisition of David Jones and sister retailer Country Road Group (CRG) in 2014, with the intention of turning it into a substantial retailer in the southern hemisphere, both businesses have been in turnaround mode.

Woolworths sunk about A$284 million (R2.9 billion) between 2016 and 2017 to reposition David Jones and CRG by mainly replacing merchandise and financial systems that better track stock availability. Woolworths’ push of its home-grown private label brands including Studio W and RE into David Jones stores flopped as the quality and fashionability of merchandise didn’t resonate with Australian shoppers.
 
CRG sales increased by 5.2% and sales in comparable stores declined by 1%.

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So W expects its SA customers to be satisfied with overpriced leftover clothing which did not “resonate” with Australian customers. Nix. So I buy at H&M now.

David Jones has been the flagship upmarket department store in Australia for decades., but they have struggled since the early 2000s with changing markets, changing customers and fierce competition from other smaller and online retailers. The two other major department stores, Myers and Gowings, suffered similarly. Gowings eventually closed down a few years ago while Myer limped along.

That’s why I was surprised when Woolies jumped in and bought David Jones. Either they didn’t know what the department store sector in Oz is going through (unlikely!), or they had a super-duper-secret-weapon that will fix it (I hoped) , OR they simply underestimated the competitiveness of Ozzy retailers (many South African businesses do) . They say it’s not the size of the dog in the fight that matters but the size of the fight in the dog.

David Jones customers complained for years about slipping standards. The quality of the products and customer service were quietly going downhill. That’s bad news for a pricey upmarket department store. Why pay $1,200 for shirt when you can have the same shirt for $400, with 24hrs delivery and avoid the clumsy sales staff.

I noticed that some David Jones clothing are popping up in Woolies’s SA stores. One look at the DJ clothing and I understand why they’re not selling well in Aus. However the quality of DJ’s clothing is stacks better than the stuff you buy from Woolies here. Woolies take note, it’s a bad omen.

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