Is Woolworths back on the front foot? 

Woolworths seems to be a story about perpetual, but unmet promise: since former Levi’s executive Roy Bagattini joined the retailer in 2020, every year has been about fixing the business – from its fashion, beauty and home (FBH) business in South Africa to its Australian asset Country Road.

For a while, it looked as if it was paying off, and the company’s shares rallied to R78 in 2023 from their Covid lows of R27. At the present price of R52, Woolworths stock is well off its highs. Yet half-year results released on Wednesday prompted a bit of a flutter in the market. On a 5.2% rise in turnover, to R41.6bn, Woolies’ headline earnings were 9.6% higher at 167c. Its FBH cluster also posted like-for-like growth of more than 6%, which is well ahead of its peers. Currency spoke to Bagattini about the performance.

Excess inventory knocked you in both South Africa and Australia. Are you still getting your fashion calls wrong, and what are you doing to change that?

It’s a combination of factors, unfortunately: product that doesn’t resonate and then you carry that through the season or you begin to mark it down during the season.

The big issue we had with inventory in South Africa related to a problem in our distribution centre (DC). In the second quarter, we couldn’t flow product appropriately – the way we normally do – through the DC into our stores and get our product on the floor in time. We had a major availability problem and then, come January, the product started to flow through but the season was a bit behind us. So there was a big carryover of inventory.

But we have shifted some of our strategies over how to clear product, and we’ve tested a concept like Woolies Outlet stores; we’ll see if there’s an opportunity to do that a little more efficiently, but the net of it is that we have brought the inventory position into a much healthier place.

What about Australia?

In Australia, we bought product and the market really just never supported it. And the macro environment is not at all positive; interest rates are going in the wrong direction and disposable spend is under pressure. There are still people buying stuff, but typically on discount; there’s not much that you buy in Australia today that hasn’t been discounted or is part of a promotion. And at the same time we had an excess inventory position which we have reduced by 15%, so we go into the second half very light, and with an ability to flow product and land newness through the season.

Is there any way you can emulate the Zara model, say, more closely?

We’re not as integrated as that and we’re a very core, basics business. When you look at the product calls one gets wrong, they’re typically in that fashion space, where you misread the trend. You’re never going to get it 100% right; there’s always stuff you might miss, but you’d like to get seven out of 10, at least.

That wouldn’t be entirely relevant to us, but we’ve made some very significant investments in the South African business in what we call “value chain transformation”. All are mainly technology businesses targeted at a better inventory management process, and the way we’ve reconfigured our distribution centres to deliver more frequently to stores, and the ability to plan and allocate more sophisticatedly than in the past.

Is it working though? One can never find, for example, medium-sized bikini pants in stock when one wants …

Well, it is beginning to work and from our own internal metrics we’re delivering much better product availability, but not necessarily across some of the fashion categories or even core categories. But it is beginning to take root. We’ve delivered the strongest growth of any apparel company in the country on a like-for-like basis. Kids has been a big play for us – very strong share growth there – but overall it will come right. This business has significant upside for us on a number of different fronts and we’ve just never ever been able to get it firing on all cylinders.

Loyalty programmes are a big deal and you launched the MyDifference rewards programme last year, but you don’t mention it in the results – how’s it doing?

We were in beta phase for longer than we wanted to and that was a consequence of customers having multiple profiles, and our ability to resolve that. It was a bit of a nightmare to square away and we’ve cleaned that all up and sorted it out. So we officially launched it in January and we’re seeing a very strong uptake. And we’re able to track the shopping behaviour and cross-shop opportunities.

We can personalise a lot more. It’s a programme designed to build connection with the customer as opposed to just reward them with points or price. But, as a business, we play in some really interesting categories and we can drive this cross-shop between food, and beauty, and fashion and home much more significantly.

We don’t have significant levels of cross-shop today and we’re going to leverage this programme to do that. Our intent is to become a prominent lifestyle brand and we’ve got all the component parts, we just need to bring it together.

What about Woolies Dash? The sales were up 23% over the half and I guess everyone is going to draw adverse comparisons to Checkers Sixty60, where sales were up 34%. Are you happy with Dash as it exists or are there changes in the offing?

There are multiple initiatives on the way to improve what we do. I mean, we’re not a scale player; we don’t sell pool chemicals etc – we sell premium foods in a cold chain. And the comparisons do get made between us and Sixty60 but they’re very different businesses.

The basket sizes in Dash are continuing to grow and we’re going to roll out a couple of other features. We’ve already set up this dark-store capability and we’ve extended the hours with Uber Eats into what we call Woolies After Dark, so there are a number of locations where you can get Woolies products up until midnight.

But our focus is a differentiated strategy as opposed to being a scale player. And, you know, we don’t mind customers coming into our stores … We track cannibalisation and there is a level of it, but having said that, we see that customers who shop Dash and in our stores are five times more valuable to us than a customer who just shops in store. And when you add what we do in After Dark, our growth rate is 30%.

As for your share price, former shareholders are aggrieved at what they see to be a lack of alignment between management and investors, and they have a strong point: Woolies shares are up only 6% over five years, despite a generous remuneration policy. What do you say to them?

Obviously, different shareholders buy into [your share] for different reasons; we have a fairly stable shareholder base where probably about 50% of our issued shares are owned by three or four shareholders, and we obviously engage with them extensively.

We have made very significant investments in our business, particularly the back-end. And we needed to do that; about R10bn in the past three years alone, across food and fashion. We are shifting the focus of that investment to be more forward facing, customer facing and market facing – so in stores and our online channels.

One of the biggest issues our shareholders have always had gripes about is the capital we have tied up in Australia. And it does not deliver nearly the same sort of returns as our businesses in South Africa. But we’ve made decisions over the last two years and we’ve had a very sequenced process around what we do in Australia.

It was a transformational move [to] exit David Jones, but it left all sorts of legacy issues for the Country Road group to deal with. But that is also behind us and Country Road is set up really nicely to deliver a business with what I think is a 10% ebitda [earnings before interest, tax, depreciation and amortisation] margin – and in short shrift. It’s not going to take us 10 years to get there.

Having said that, our returns on capital, especially in our food business, are stellar. It delivers 15%-odd return on capital. When you take that together with our FBH business, we’re delivering return on capital way above our average cost of capital. We’ve got the most generous dividend payout policy in the industry and we’re doing a number of share buybacks; we’ve bought back about R4bn worth of shares. So our approach to capital allocation is very disciplined and focused. We don’t unfortunately get where we want to as quickly as we would like but we are getting there surely.

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_{Top image: Woolworths CEO Roy Bagattini. Picture: supplied.}