Serious problems at Woolworths

There is a reason Woolworths’ share price lost over 10% of its value over the last year. It faces serious challenges, and the management team could not answer basic questions about it.

On Wednesday, Woolworths announced its interim financial results for the 26 weeks ended 29 December 2024.

The group’s turnover and concession sales increased by 5.7% to R40.3 billion. Woolworths South Africa achieved a substantial turnover growth of 9.1%.

However, other figures were not good. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortisation) declined by 6.4% to R4.5 billion.

Adjusted earnings before interest and taxes (EBIT) for the 26 weeks were even worse, declining by 13.7% to R2.8 billion.

Woolworths’s operating profit from core trading activities declined by 13% to R2.7 billion, and its net cash inflow from operating activities declined significantly.

The company’s profit before tax increased by 6.3% to R2.6 billion. However, adjusted profit before tax decreased by 21% to R2.0 billion.

Adjusted diluted headline earnings per share (HEPS) declined by 19.4%, and Woolworths cut its interim dividend by 28%.

The group’s profitability came under pressure as its gross profit margin and its operating profit margin weakened.

Without adjusting Woolworths’ net profit for “once-off” items, the group’s net profit margin also deteriorated from the previous period.

Despite these dismal figures, Woolworths chief executive Roy Bagattini said the group has done a fantastic job.

“We have a world-class food business, which remains our engine room for value creation,” Bagattini said in a statement.

“We are building our apparel businesses’ foundational capabilities to drive long-term sustainable growth.”

He is confident in the outcomes this will achieve, given the group’s clear strategies, trusted brands, key competitive advantages, and committed teams.

Woolworths warned that the United States’ recent decisions regarding global trade relations have elevated the forecast risk.

This forecast risk includes the macroeconomic outlook for the current year, particularly in the case of South Africa.

Despite these challenges, Woolworths is confident in its ability to achieve its strategic objectives and benefit from any cyclical recovery in consumer spending.

The market did not agree. Woolworths’ share price declined after the results, and is down over 10% over the last year.

Woolworths’ Australian operations

The results revealed that Country Road was Woolworths’ worst-performing segment. Its revenue decreased by 8.8% from R7.2 billion to R6.6 billion.

Country Road also recognised a significant loss. Its pure, unadjusted profit before tax fell by 160% from a profit of R400 million to a loss of R227 million.

This continued the deteriorating profitability Country Road experienced over the past few years.

Even more concerning than the poor performance is that Woolworths reported that Country Road breached a debt covenant on a R1.04 billion loan.

Lenders establish debt covenants to ensure that borrowers maintain a minimum level of creditworthiness and lower the risk of a default.

When debt covenants are breached, lenders can potentially lay claim on the assets set as collateral to the loan depending on the loan agreement.

Country Road Group could not generate EBITDA large enough to cover its debt obligations sufficiently as set out in the covenant agreement. 

The assets set as collateral for the R1 billion Country Road group loan are the group’s property assets and a general claim on Country Road’s other assets.

Fortunately, the lender bank waived the covenant breach on this occasion. This means the bank voluntarily decided not to take legal steps under a covenant breach.

If the financial institution decided to take action, it could have included seizing Country Road’s collateralised assets.

The debt covenant breach signals that Country Road Group is facing significant liquidity issues, which should be addressed.

Woolworths’ Australian operations have long been a problem, and things are unlikely to improve rapidly.

“In Australia, the retail sector is likely to remain highly promotional until such time as the pressures of living costs ease,” it said.

During the second half of the financial year, Woolworths will reassess the carrying value of the assets of its underperforming brands within Country Road.

“This exercise will consider the macroeconomic environment, our strategic plans, and our reset operating model.

Woolworths management avoids answering tough questions

BusinessTech’s analyst attended the results webcast and asked Woolworths’s management about its problematic areas.

The first question was about Country Road breaching its debt covenants, which the Woolworths management ignored.

The second question was how much Woolworths sold David Jones for and how much it lost through this deal.

Woolworths’s management ignored both questions. Instead, it opted for soft questions related to the business.

This is unsurprising. Woolworths has consistently avoided providing in-depth details about its David Jones transactions.

Woolworths’ disastrous David Jones adventure ended with the sale of the Australian retailer eight years after it was bought.

On 19 December 2022, Woolworths announced it was selling its entire stake in David Jones to Anchorage Capital Partners, an Australian private equity fund.

However, Woolworths did not disclose how much it would get for David Jones nor tell the market the selling price.

Bloomberg reported that Woolworths sold David Jones for around AUD$130 million, translating into R1.6 billion.

This represents a value of R19.8 billion less than the R21.4 billion Woolworths paid for David Jones in 2014.

Woolworths’s strategy to give as little as possible information about David Jones has now shifted to Country Road.