Woolworths increases sales in face of souring consumer confidence

Woolworths store at the V&A Waterfront in Cape Town.

Picture: BDlive

The retailer said sales in the year to end-June 2016 had risen 16.4% compared with the year-earlier period. Excluding its Australian acquisition, David Jones, Woolworths said sales had risen 12%.

But Gryphon asset management portfolio manager Reuben Beelders said the perception that Woolworths could withstand a downturn in the economy as it catered to higher-income consumers who were “shielded”, was being put to the test. “The rand has weakened, and the interest rate hikes have also taken their toll. We can see, based on these results, that the upper-end consumer is also under a bit more pressure.”

The Reserve Bank has hiked interest rates 200 basis points in total since January 2014. Consumer confidence, on the other hand, remains at levels last seen during the 2008-09 recession. Barring drastic changes in the economy, this is likely to be the trend for the rest of 2016.

Woolworths said its group apparel sales in the second half had been hurt by a late start to winter, “and the unseasonable warm weather experienced across the southern hemisphere”. Subsequently, its clothing and general merchandise operations increased sales 8.2%, with inflation of 6.2%. Sales in comparable stores were up 4.4%, while net retail space grew 4.9%.

Food sales, including food service concessions, increased 11.9%, with inflation of 6.7%. Sales in comparable stores were up 5.7%, while net retail space grew 9.3%.

36One analyst Daniel Isaacs said the update pointed to a marked slowdown in the second half of the financial year compared to interim results.

“The major disappointment came in clothing. The company attributed it to the weather but it’s likely there were other factors as well — perhaps stock that did not prove popular with shoppers. The food business, on the other hand, did well,” he said.

David Jones had performed well, Isaacs said, while Country Road had not, “but Woolworths has flagged the ongoing issues there. The overall results were slightly disappointing".

Beelders said the food operations results — taken in the context of food inflation and new store growth — had actually shown a decline in sales volumes. “The food category has been the driver of the group for a couple of years, so the figure is a bit concerning.”

While David Jones had shown good results in the period, Woolworths’ acquisition of the retailer might not have been a great step for the company, he said.

On a 52-week basis, David Jones sales, including concession sales, rose 8.4% in Australian dollar terms. Sales in comparable stores grew 7%, and net retail space grew 3.5%.

“At the end of the day, what has disappointed me has been the reduction in the return of equity,” Beelders said.

“I think Woolworths will battle to get it back to the levels it was before the David Jones acquisition.”

At the close of the JSE on Thursday, Woolworths’s share price had declined 0.7% to R82.32, valuing the company at about R86.7bn.