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Woolworths (WHL)
Category: Stock Market
(Price at time of writing: R50.03 as at 23 August 2018)

Related Topics

• Shoprite
• Mr Price
• Spar
• Pick 'n Pay
• ​Woolies Feb 2016​

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For the latest regarding Woolworths financial results (21 Feb 2019) click here

Background and overview of Woolworths( WHL)

Woolworths Holdings Limited (WHL) is a South African-based retail group listed on the Johannesburg Stock Exchange since 1997. 

The WHL Group consists of three main operating companies, Woolworths Proprietary Limited (Woolworths), David Jones Limited (David Jones) and Country Road Limited (Country Road Group). Woolworths Financial Services (Proprietary) Limited (Woolworths Financial Services) is a joint venture with Barclays Africa Group. See http://www.woolworthsholdings.co.za/

WHL's share price has taken an absolute pounding in the recent past and investors must be worrying if this trend will ever stop. See the graphic below for WHL's share price. Also see our Sector Comparison page where we compare the share price over time of WHL with other retailers such as Shoprite, Massmart etc.

The interactive chart below shows Woolworths (WHL) share price for the last number of years. Adjust the data and the chart recalculates WHL's share price movement, change the negative and positive candle colours, download the graphic or the data.

Red Faded Red Green Lime Blue Arctic Blue Turquoise Caramel Chalk Orange Purple Gray Pink Brown Black

Percent change:

 Woolworths operates in a very congested market. They have competition on the food side from Spar, Pick 'n Pay, Shoprite, and on the clothing front from The Foshini Group and Mr Price. Their net profit margins are however superior to most of these retailers, offering a compelling value investment case before even digging any deeper into their financial results (which we do below). 

Financial review: 

Below a summary of the Woolworths group's performance over the last 12 months as contained in their financial results:

Woolworths Fashion, Beauty and Home
Sales declined by 1.5% for the year and comparable store sales were 4.1% lower. Price movement was 0.8%. Our womenswear modern range failed to resonate with our core customer. Gross profit margin was impacted by higher markdowns and promotional activity, and declined by 1.2% to 46.7%. Costs were well controlled, with comparable store costs of 2.7% and total store cost growth of 6.4%, with 2.5% new space added. Other operating costs were flat on the prior year. Despite good cost control, operating profit declined by 21.3%, to R1 706 million.

Woolworths Food
Our Food business continued to outperform the market, with sales growth of 8.4% and comparable store sales growth of 4.8% on price movement of 3.2%. Store costs increased by 9.5%, with comparable store cost growth of 5.0%. Net new space grew by 3.5%. Other operating costs were 2.1% up on last year. Operating profit increased by 9.6% to R2 167 million.

Woolworths Financial Services
Woolworths Financial Services also had a good year, with the average debtors book growing by 4.6%. The impairment rate for the 12 months ended 30 June 2018 reduced by 1.1% to 5.2%, and operating profit was grew by 11.9%.

David Jones
The business experienced significant change during the year, including the implementation of new merchandise and finance systems, the re-platforming of its online systems, the launch of the new food initiative, and the move of its head office from Sydney to Melbourne. After a difficult first half, sales increased by 2.2% and by 2.7% in comparable stores in the second half. Full year sales were 0.9% lower (and 0.4% lower in comparable stores). Expenses increased by 8.8% as a result of the investment in food and other strategic initiatives. Comparable store costs were well controlled at 1.5%, but operating profit declined by 49.6% to A$64 million. Net retail space grew by 0.1%, with 4.2% new space offset by 4.1% of space reductions and closures. The sales disruption from the refurbishment of the Elizabeth Street store in Sydney will continue for approximately another 18 months.

Country Road Group (CRG)
Country Road Group had a mixed year. Strong performances from Witchery, Mimco and Politix were offset by a weaker Country Road womenswear performance, resulting in comparable store sales, which exclude Politix (acquired in November 2016), declining by 1.8%. Including Politix, sales increased by 1.7% for the year. Net retail space grew by 2.5%. Gross profit margin improved by 2.5% to 62.8% from higher full-priced sales and reduced promotions. Store and operating costs increased by 6.1%, mainly as a result of Politix, with comparable store costs increasing by 1.9%. Operating profit increased by 5.1% to A$103 million.

Cash generated from operations amounted to R7.062billion (or R7.36 per share) for the period.  This is lower than the cash generated per share for their previous set of financial results. Due to more shares in issue and less cash generated by the business in total. Total cash and equivalents on their books is sitting at a worryingly low R1.878billion (or R1.96 a share). Both of these indicators show that woolies is pretty cash flush and potential investors should not be to concerned about their cash position (even if the share price shows that there are investor concerns regarding WHL and it's future profit potential.

A key variable to look at when it comes to the retailers (in particular those ones active in the clothing segment) is the level of inventories. Are the goods at the shop moving fast enough, or are the inventories starting to stack up. Increasing inventories usually show that stock is moving slower (or the business is bolstering up in expectation of increased demand).

WHL inventories increased from R6.99billion a year ago to R7.54 billion currently. Inventories therefore showing an increase of 7.8%. Inventories are therefore a slight concern for woolies right now. Is inventories building up because stock in the shops are not moving fast enough?

​The pie charts below shows the contribution to turnover and to operating profit of Woolworths various businesses

From the pie charts it is clear that Woolworths Clothing and General Merchandise earns the strongest margins. It makes up under 20% of turnover but brings in around  24% of operating profit. Woolies foods the biggest contributor to turnover (making up more than a third (43%)) of turnover but only contributing 28% to operating profit. Clearly showing that margins are under pressure in the foods division. The two Australian operations David Jones and Country Road seems pretty stable in terms of contributions to both turnover and operating profits. The Aussie operations bringing in around 20% of all WHL's revenue but impresses by bringing in just over 50% of operating profit. Their Aussie operations were tipped to make up more than half of their revenue and profits in future and it seems like its getting there.

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• Net Profit Margin: 4.98%
• Dividend Yield: 4.77%
• Diluted headline earnings per share: R3.44 (placing it on a PE ratio of just over 14)
• Cash generated per share: R7.36 (pretty strong cash generation per share)
  

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Valuation: 

Based on WHL's current financial results we value them at between R88.20 and R89.50. We therefore feel that the sell off in WHL has been overdone and we expect WHL to offer long term shareholders buying at this price superior returns to the market if they willing to hold on and ride WHL back up. A valuation of R88.20 places WHL on a PE of 24 And yes current investors will say the PE is to expensive. At least some of that is offset by a strong dividend yield of close to 5%.  And one has to remember WHL is an extremely strong brand and has a significant market presence in both the food and clothing space in SA. Others may not agree with our strong valuation price for WHL, but the dividend, their strong cash generation and solid balance sheet makes us overweight on WHL.

We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.

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We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.

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Related Topics

• Shoprite
• Mr Price
• Spar
• Pick 'n Pay
• ​Woolies Feb 2016