{"id":815434,"date":"2025-03-05T13:30:00","date_gmt":"2025-03-05T11:30:00","guid":{"rendered":"https:\/\/businesstech.co.za\/news\/?p=815434"},"modified":"2025-03-05T13:32:31","modified_gmt":"2025-03-05T11:32:31","slug":"serious-problems-at-woolworths","status":"publish","type":"post","link":"https:\/\/businesstech.co.za\/news\/business\/815434\/serious-problems-at-woolworths\/","title":{"rendered":"Serious problems at Woolworths"},"content":{"rendered":"\n
There is a reason Woolworths\u2019 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.<\/p>\n\n\n\n
On Wednesday, Woolworths announced its interim financial results for the 26 weeks ended 29 December 2024.<\/p>\n\n\n\n
The group\u2019s turnover and concession sales increased by 5.7% to R40.3 billion. Woolworths South Africa achieved a substantial turnover growth of 9.1%.<\/p>\n\n\n\n
However, other figures were not good. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortisation) declined by 6.4% to R4.5 billion.<\/p>\n\n\n\n
Adjusted earnings before interest and taxes (EBIT) for the 26 weeks were even worse, declining by 13.7% to R2.8 billion.<\/p>\n\n\n\n
Woolworths\u2019s operating profit from core trading activities declined by 13% to R2.7 billion, and its net cash inflow from operating activities declined significantly.<\/p>\n\n\n\n
The company\u2019s profit before tax increased by 6.3% to R2.6 billion. However, adjusted profit before tax decreased by 21% to R2.0 billion.<\/p>\n\n\n\n
Adjusted diluted headline earnings per share (HEPS) declined by 19.4%, and Woolworths cut its interim dividend by 28%.<\/p>\n\n\n\n
The group\u2019s profitability came under pressure as its gross profit margin and its operating profit margin weakened.<\/p>\n\n\n\n
Without adjusting Woolworths\u2019 net profit for \u201conce-off\u201d items, the group\u2019s net profit margin also deteriorated from the previous period.<\/p>\n\n\n\n
Despite these dismal figures, Woolworths chief executive Roy Bagattini said the group has done a fantastic job.<\/p>\n\n\n\n
\u201cWe have a world-class food business, which remains our engine room for value creation,\u201d Bagattini said in a statement.<\/p>\n\n\n\n
\u201cWe are building our apparel businesses’ foundational capabilities to drive long-term sustainable growth.\u201d<\/p>\n\n\n\n
He is confident in the outcomes this will achieve, given the group’s clear strategies, trusted brands, key competitive advantages, and committed teams.<\/p>\n\n\n\n
Woolworths warned that the United States’ recent decisions regarding global trade relations have elevated the forecast risk.<\/p>\n\n\n\n
This forecast risk includes the macroeconomic outlook for the current year, particularly in the case of South Africa.<\/p>\n\n\n\n
Despite these challenges, Woolworths is confident in its ability to achieve its strategic objectives and benefit from any cyclical recovery in consumer spending.<\/p>\n\n\n\n
The market did not agree. Woolworths’ share price declined after the results, and is down over 10% over the last year.<\/p>\n\n\n\n
Woolworths\u2019 Australian operations<\/strong><\/h2>\n\n\n\n
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.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
This continued the deteriorating profitability Country Road experienced over the past few years.<\/p>\n\n\n\n
Even more concerning than the poor performance is that Woolworths reported that Country Road breached a debt covenant on a R1.04 billion loan.<\/p>\n\n\n\n
Lenders establish debt covenants to ensure that borrowers maintain a minimum level of creditworthiness and lower the risk of a default.<\/p>\n\n\n\n
When debt covenants are breached, lenders can potentially lay claim on the assets set as collateral to the loan depending on the loan agreement.<\/p>\n\n\n\n
Country Road Group could not generate EBITDA large enough to cover its debt obligations sufficiently as set out in the covenant agreement.\u00a0<\/p>\n\n\n\n
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\u2019s other assets.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
If the financial institution decided to take action, it could have included seizing Country Road\u2019s collateralised assets.<\/p>\n\n\n\n
The debt covenant breach signals that Country Road Group is facing significant liquidity issues, which should be addressed.<\/p>\n\n\n\n
Woolworths\u2019 Australian operations have long been a problem, and things are unlikely to improve rapidly.<\/p>\n\n\n\n
\u201cIn Australia, the retail sector is likely to remain highly promotional until such time as the pressures of living costs ease,\u201d it said.<\/p>\n\n\n\n
During the second half of the financial year, Woolworths will reassess the carrying value of the assets of its underperforming brands within Country Road.<\/p>\n\n\n\n
\u201cThis exercise will consider the macroeconomic environment, our strategic plans, and our reset operating model.<\/p>\n\n\n\n<\/a><\/figure>\n\n\n\n
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