Woolworths Offers ‘Glimmers of Hope’ for Retailers
Woolworths Offers ‘Glimmers of Hope’ for Retailers
(Bloomberg) -- Full-year earnings from Woolworths Holdings Ltd. showed signs of improving performance at the retailer, despite the uninviting conditions for companies targeting South African consumers, analysts said.
Woolworths’s profit came in just below the mid-range of guidance, said Henre Herselman, a derivatives trader at Johannesburg-based Anchor Private Clients. “With the current sentiment toward the economic climate of South Africa, investors probably expected the worst, which ended up not being the case.”
Comments from Cape Town-based Woolworths about a pick-up in food sales and that its clothing business had turned the corner fueled optimism, causing a positive knock-on effect Thursday for Massmart Holdings Ltd., Mr Price Group Ltd. and some other retailers, Herselman said.
Woolworths gained as much as 5.7%, the most in seven weeks. An index of general retailers advanced 1.7%, with Massmart rising 5.5% after a first-half update and Mr Price climbing 2.7%.
Here’s more of what analysts are saying:
Michele Santangelo: Independent Securities
- The clothing division, which is a big component in earnings, has weighed on Woolworths for the last few years, but showed some signs of improvement.
- The group saw a better second half, driven by the South African operations. The Australian operations still remain a concern, particularly David Jones, with further earnings deterioration. But management is optimistic that there will be improvements going forward.
- Debt levels will continue to concern investors, with Woolworths remaining one of the most-leveraged retailers in South Africa, which will limit room for maneuver on its balance sheet.
- Retailers in South Africa still face significant challenges from all fronts. Weak demand coupled with rising costs and high levels of competition will continue to make the operating environment very difficult.
Lester Davids: Unum Capital
- While growth was muted as expected, the jump in the company’s share price may be reflective of management’s outlook where it states that it expects food to continue to trade ahead of the market
- The South African retail environment is driven by the macro-economic backdrop, which is currently under significant pressure.
- The shift to online shopping is an issue that retailers have to manage while grappling with stagnant revenue, declining earnings, currency devaluations and margin compression.
- “On this basis, combined with the elevated valuations, it’s hard to see significant share price appreciation unless the macro backdrop takes a positive turn.”
Herselman: Anchor
- “This morning’s moves, I would probably ascribe to a bit of bargain hunting perhaps, after the comments from Woolies management that there is a glimmer of hope on a turnaround.”
- South Africa currently falls into the value-trap category, because there is no earnings growth on the domestic stocks. So until they improve, these stocks will just drift.
Charles Allen: Bloomberg Intelligence
- Improved trading in South African clothing and some signs of improvement at David Jones seem to confirm that Woolworths has passed its operational nadir.
- There’s more evidence that the retailer is fixing its South African fashion missteps with a return to its quality, good-value roots.
- There are still risks involved in reviving David Jones, as the combination of creating luxury flagship stores, a more than 20% space reduction and greater focus on own-label clothing for mid-market stores is likely to keep margin constrained.
To contact the reporter on this story: Adelaide Changole in Nairobi at achangole2@bloomberg.net
To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, John Viljoen, Tom Lavell
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