Woolworths' Quest for Southern Hemisphere Domination Dented

(Bloomberg) -- Woolworths Holdings Ltd.’s plan to create a southern hemisphere retail giant is being hampered by impairments and slower-than-anticipated growth at its Australian department-store chain David Jones.

The South African specialist in organic food and designer clothing for wealthier customers expanded in Australia in 2014 with the $2 billion purchase of the 180-year-old chain. The aim was to revive business and allow Woolworths to challenge fashion retailers Inditex SA, Hennes & Mauritz AB and Fast Retailing Co. in key markets south of the equator. But it’s not working out that way - at least not as fast as initially expected by Cape Town-based Woolworths.

Fashion missteps and tough selling conditions in its home market and in Australia -- together with a revaluation of David Jones that resulted in an impairment charge of 712.5 million Australian dollars ($524 million) -- resulted in Woolworths posting its first full-year loss since at least 2002 Thursday. The head of David Jones was fired earlier this year.

“The biggest mistake Woolworths made was failing to recognize that department stores are a dying breed,” said Syd Vianello, an independent retail analyst in Johannesburg said prior to the earnings release. “David Jones was ripe for the picking, but maybe Woolworths was overconfident that they would get it right.”

‘Wholesale Changes’

Headline earnings per share fell 18 percent to 3.46 rand a share, in the middle of a forecast range, Woolworths said in a statement. The retailer cut the full-year dividend by 24 percent to 2.39 rand a share.

“Significant costs and disruption from transformation initiatives in David Jones and poor performance in our fashion business in South Africa have led to a result for the group that is disappointing,” Chief Executive Officer Ian Moir said in an analyst presentation.

The Australian retail market has been notorious for South African failures, with companies including Truworths International Ltd. and Pick n Pay Stores Ltd. pulling out of the country. Moir was the head of Country Road in Australia for a decade before taking over at Woolworths in 2010.

When Moir, 59, announced the David Jones deal, he knew the chain was well recognized in Australia and he had successfully leveraged the equally well-known Woolworths brand in South Africa. Moir brought in greater cost control and pushed the use of the chain’s own range of premium lines of clothing. To get more margin in Australia, Moir decided to grow private-label sales at David Jones and sell Woolworths own brands.

“A large part of the turnaround plan required some wholesale changes in the business, particularly the introduction of about 20 percent of sales being own brand,” Alec Abraham, an analyst at Sasfin Securities Pty Ltd. “The market was fragile as it was, you come with those kind of changes and it had a tremendous impact on the business. It was a naivety that the extreme trading environment was not going to play a major factor in any turnaround.”

Star Performer

Woolworths is also expanding its food offering in Australia. Last year, it opened Bondi Junction food outlet, offering both a restaurant and food store in Australia for the first time. New and expanded food options include sites in Wollongong, Melbourne and in Sydney’s Elizabeth Street store.

Trading for the first seven weeks of the new financial year has shown positive signs, Woolworths said, although a change in political leadership in South Africa has yet to translate into higher consumer spending -- partly due to a higher cost of living.

Woolworths shares have dropped 21 percent this year, valuing the company at 54 billion rand ($3.8 billion). That compares to a 5.4 percent decline at Shoprite, Africa’s largest grocer, which is valued at 124 billion rand.

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