Woolworths reported FY20 results on 17 September, with FY20, and especially 2H20, a tough period for the business, as it entered the COVID-19 pandemic with a new CEO (Roy Bagattini took over as CEO from Ian Moir in February), following ongoing issues in Australia and some fashion misses in South Africa (SA). However, a bright spot for the Group was the resilience shown by its Food business, which continued to show robust growth, albeit at a slightly slower pace than, for example, the numbers reported by Checkers. Online food sales especially spiked higher, jumping 87.8% in 2H20 and 57.2% YoY.
Overall, total Group turnover was down 0.1% YoY to R78.3bn, with the 2H20 performance (-4%) severely impacted by the temporary closure of its non-food stores due to lockdowns. An easing of these restrictions from the start of May (both in SA and in Australia) resulted in some recovery during the last nine weeks of 2H20. Still, HEPS fell 64.8% YoY to ZAc116.2 as challenging conditions due to the pandemic placed pressure on its 2H20 performance. The company’s outlook statement was also extremely cautious and, while Woolworths had declared a dividend of ZAc89.0/share in 1H20, management guided that dividends would be suspended until there is more clarity on the Group’s financial situation. A concern for us is that Woolworths seems to be struggling to regain traction after the easing of the lockdowns. Food is still performing well but, as mentioned, is slowing, and losing market share when comparing Woolworths’ numbers to those reported by Checkers. Other retailers, especially the value retailers, have also recently reported reasonably strong recovery numbers.
Having said that, it is not difficult to find value in Woolworths even if we use extremely conservative valuation assumptions. On the presumption that Woolworths can close its David Jones business in Australia, we easily calculate a valuation on the SA business of only R36/share. However, if Woolworths can hold on to Country Road as well, then this can increase even more (we note though that we are not sure what will happen to the company’s Australian debt in such a scenario). Unfortunately, we do not believe that Woolworths will be able to disentangle its current structure easily. The firm will, in all likelihood, need to push more capital into David Jones and it would seem to us that David Jones and Country Road are now joined at the hip.
Accordingly, we are not yet willing to buy shares in this business. While we like Woolworths Food, the Group’s other business units are still facing severe headwinds and we are concerned that the ongoing struggles in these other segments may cause management to drop the ball on its well-functioning businesses, thereby losing the goose that lays the golden eggs.
This was a tough period for Woolworths, especially 2H20. Not only did it have to deal with the COVID-19 induced lockdowns, but it entered the crisis with issues including fashion misses locally and ongoing struggles around its department store concepts in Australia. Still, overall, the results were slightly better than expected and, for the most part, this was due to another strong performance from the company’s Food business. Unfortunately, Woolworths continues to be weighed down by the performance of David Jones in Australia, despite the SA business performing reasonably well.
It is easy for us to see value in Woolworths if the world was a simple as a spreadsheet. Doing a sum-of-the-parts (SoTP) valuation on the share, we can easily justify R36/share for the SA business alone. Unfortunately, we also believe that it will not be easy for Woolworths to exit Australia and, as such, we continue to avoid the share. We note that what was most concerning to us in the company’s results presentation is that its Food segment lost market share for the first time in almost a decade. In our view, this may be because the company’s struggles in Australia are continuing to distract management attention away from Woolworths’ other, well-functioning businesses.