Woolworths eyes full-line supermarkets

The company, which has a market capitalisation of R34.8 billion will open its first large scale supermarket in April at the Nicolway Bryanston shopping centre in Johannesburg.

This is a hop, skip and jump away from rival Pick n Pay's R160 million flagship store, "Pick n Pay on Nicol" which opened in 2010.

"We're going to concentrate on the customers we've got. We're going to get them to spend more with us and maybe we'll even attract those LSM 8-10 customers who are shopping in Pick n Pay and Checkers," CEO Ian Moir said on Thursday, 16 February 2012.

Moir added that its supermarket strategy was not a knee-jerk reaction to Pick n Pay, but a template for the roll-out of a particular type of model that was right for Woolworths.

"We see 10 or more of these [stores] in a relatively short space of time, the only constraint to these will be getting the real estate. So we already have three or four of these sitting and waiting to run," he said.

According to Absa Investments analyst Chris Gilmour, Woolworths was making a very aggressive statement.

"I think it's incredibly positive. Four or five years ago the typical number of stock-keeping units (SKU's) in Woolies was 3,500-4,000, now it's almost double that, and they going to expand their offering quite considerably.

"These guys have 9%-10% market share they are big enough to get the kinds of discounts so they can have a reasonable pricing proposition for customers," Gilmour told I-Net Bridge/BusinessLIVE.

The favourable foreign exchange impact of a weaker rand, as well as strong growth over the festive season saw Woolworths report a 36% surge in first half profit on Thursday.

Consumers shopped up a storm in December - on Wednesday, Stats SA said December's retail sales rose 8.7%, from a revised 7.2% in November.

Growth was expected to ring in at 6.7%, according to a survey of leading economists by I-Net Bridge.

Woolworths reported diluted headline earnings per share of 131.3 cents from 96.6 cents previously. Sales rose 11.1% to R14.2 billion.

Food sales grew ahead of the market at 11.7%, as the company raised prices an average of 4.8%, and sales of clothing and general merchandise increased 10.1%, as prices increased 7%.

Woolworths return on equity (ROE) for shareholders increased from 44.9% to 50.8%, its highest in 12 years.

This was underpinned by its share buyback programme and improved returns in the core businesses.

Gilmour said this was "unbelievable".

"When you compare it to their weighted average cost per capital, which has been remarkably consistent for over five years, this thing just keeps widening and there's plenty scope for more," Gilmour said.

ROE is a good measure of whether shareholders are getting value for their investment - and one of billionaire Warren Buffet's favourite ratios to consider when choosing a share.

Performance in the Cape Town-based company's clothing division disappointed.

"If you look at clothing overall, we were slightly behind the market and that was driven by women's wear where we were behind the market, and that's what we need to fix," Moir said, adding that some categories within clothing like kids wear, women's accessories and lingerie did trade well.

Woolworths clothing sales including Country Road's South African operations grew 11.2%, with sales in comparable stores up 5.9%.

"We traded sort of where Truworths did, but not as well as The Foschini Group and we did a bit better than Edgars did.

"Overall are we happy with our performance in clothing? No, we're not but we will get better," Moir said.

One of these improvements is the shortening of its merchandise cycle.

"We want to get more newness, more often - you can't, as a business, do six week drops anymore, back in the good old days that was fine, but not anymore, when you've got competition like Zara and The Foschini Group who are doing a good job on fashion.

"So every two weeks we now drop fashion, it started in late November and we've seen lifts in performance," Moir commented.

Spain's Zara, owned by Inditex, the world's biggest fashion retailer opened its doors in SA late last year.

Much like the arrival of US powerhouse Wal-Mart, the imports' arrival has been touted as a game changer for the local industry.

Looking ahead, Woolworths said it believed that economic conditions in SA would remain constrained.

"All I'm going to tell you is its going to be more of the same. I don't expect any major surprises; the business is travelling well and consistently. What you see in the first half will not be dissimilar to the second half," Moir said.

At 5.10pm Thursday, Woolworths shares were trading at R41.70, down 1.88% from Wednesday's close.