Woolworths has a big problem

Woolworths is seriously hamstrung by its apparel businesses in South Africa, Australia and New Zealand.

The group recently published a trading update for the 26 weeks ended 29 December 2024, which showed that the group’s turnover and concession sales increased by 5.7% and 6.2%, respectively.

Despite the strong performance of the group’s food business, the weaker-than-expected performance of its apparel businesses in South Africa and Australia will impact headline earnings, which are expected to drop 22% and 27%, respectively.

Speaking with BusinessTech, Chantal Marx, Head of Investment Research at FNB Wealth and Investments, said that Woolworths’ financial guidance was disappointing.

Marx added that the bottom-line guidance was tracking well behind full-year expectations.

The top-line growth was better than expected, with the group benefitting from sales growth in its Food business.

However, lower contributions from the apparel businesses in South Africa, Australia and New Zealand were disappointing.

“Looking ahead, consumer sentiment in South Africa is improving, supported by moderating inflation, interest rates easing, and the prolonged suspension of load shedding,” said Marx.

Offshore, improved consumer sentiment in Australia and the uplift in retail sector sales buoyed by Black Friday were key highlights.

Nevertheless, the sustained effect of high interest rates and elevated living costs continues to weigh on consumer behaviour and discretionary spending.

The numbers from the trading update support Marx’s insights.

Woolworths South Africa delivered turnover and concession sales growth of 9.1% for the 26 weeks ended 29 December 2024.

The Food business saw turnover and concession sales growth of 11.4% and 7.3% on a comparable-store basis. Excluding the recently acquired Absolute Pets, food sales jumped by 9.0%.

Online sales increased by 37.2%, with Woolies DASH, which saw sales growth of 49.2%, driving the overall increase.

Fashion, Beauty and Home (FBH )turnover and concession sales increased by 2.5% and by 2.7% on a comparable-store basis over the period.

That said, sales growth in the last eight weeks was constrained to 0.9% due to temporary delays in products amidst later supplier deliveries and systems changes at its distribution centre.

The Beauty business was a bright spark, delivering growth of 17.3% over the period, with the group planning to further expand the business.

Amidst a restructuring, the Australian-based Country Road Group saw sales decline by 6.2% over the period and by 7.8% on a comparable-store basis.

Fairly priced

The group noted that it has disposed of the David Jones Flagship Store property in Bourke Street, Melbourne, for AU$223.5 million.

The group maintained control of the building after selling David Jones in early 2023 following an unsuccessful takeover of the Australian department store a decade prior.

Marx said that the profit of the sale of the property is positive for earnings on a reported basis in the short term and will strengthen the balance sheet.

Looking at the fundamentals of the stock, Marx said that it looks neither cheap nor expensive.

That said, the loss of rental income will likely hurt earnings in the medium term.

Given the near- and medium-term challenges facing the group, the stock looks fairly valued on a forward PE of 14.1 times.