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Woolworths update bodes ill for sector

| Economic factors

There are further signs of trouble in SA’s struggling retail sector, with Woolworths releasing a poor trading update that analysts say can only be a bad omen for the rest of the retailers still to release their Christmas figures.

Sasfin Wealth senior equity analyst Alec Abraham said as disappointing as the update was, the blue chip retailer is likely to have done better than its peers.

"It missed on sales growth and earning growth but I think it shows that the high-end consumer is more resilient. Overall it shows the extreme pressure on consumer spending."

Woolworths said group sales for the first 26 weeks ended December 25 had increased 6.7% compared with the year-earlier period. The clothing and general merchandise division reported an increase in sales of 3.5%. Price movement was 7.3%.

Sales in comparable stores grew 1.2% and retail space grew a net 2.9%. Food sales were 9.5% higher. Excluding new stores, food sales grew 5.6% and retail space grew a net 7.9%.

Abrahams said volumes had declined in both the clothing and the food divisions.

Kagiso Asset Management associate portfolio manager Simon Anderssen said Woolworths had not disclosed comparative store sales growth for Country Road and David Jones in Australia, complicating an assessment of the group’s trading performance.

At David Jones, sales were 4% higher than the prior year in Australian dollar terms. Retail space grew a net 3.4%. At Country Road, sales fell 0.9% and retail space, excluding newly acquired Politix, grew 2.2%.

The retailer said growth in both David Jones and Country Road had been negatively affected by the timing of Boxing Day. Anderssen said management had also said that interim adjusted headline earnings per share would be 0%-5% lower compared with the year-earlier period.

"Woolworths has a number of strategic plans in place to diversify its business and grow earnings over the next three years," Anderssen said.

Electus Fund Managers equity analyst Damon Buss said given that Woolworths was the first retailer to report, it was difficult to know whether the poor numbers were a result of down-trading, which would be beneficial for other retailers, or if consumers were simply reducing consumption.

"We think it is a bit of both but this will only be confirmed when the rest of the retailers release their trading updates."

Buss said of greatest concern in the trading update was the headline earnings figure, which implied margins had been negatively affected in the period.

"The challenge for Woolworths is that they are a well-run business so have little room to cut costs and hence are reliant on like-for-like top-line growth exceeding cost growth — something they are struggling to achieve at the moment.

"Our concern is that the integrating and fixing-up of the Australian acquisitions [have] resulted in the management team taking their eye of the ball in the South African businesses, hence the loss in market share and negative like-for-like volume growth," Buss said.

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