Woolworths Sees Worsening Outlook as Consumers Feel Pressure

  • South African retailer sees domestic pain from interest rates
  • Stock tumbled as much as 10% in Johannesburg Thursday

Woolworths Holdings Ltd., a South African food and clothing retailer, said weaker consumer spending and economic growth will make trading conditions more difficult this year in both its domestic and Australian market.

“It’s going to get tougher,” Chief Executive Officer Ian Moir said on a conference call from Cape Town on Thursday. “The Australian economy will not be as tough as South Africa, but is quite dependent on the Chinese economy and is not without risks.” 

South African retailers and consumers are under pressure as the country’s worst drought in more than a century pushes prices higher, with December food inflation climbing to 5.8 percent. Meanwhile, a weakening rand prompted the central bank to raise interest rates by half a percentage point last month, increasing repayment costs for those with loans or mortgages.

“Increasing interest rates in South Africa will add further pressure on the local consumer,” Moir said. “I think we will take market share, but we need to keep on top of costs.”

Woolworths shares, which rallied 30 percent in 2015, fell 7.7 percent to 86.15 rand by the close in Johannesburg. The stock earlier dropped as much as 10 percent, the most since June 1999. It has slumped 14 percent this year, compared with a 13 percent retreat in the FTSE/JSE Africa General Retailers Index.

Diluted earnings per share excluding one-time items rose 31 percent to 2.51 rand in the six months through Dec. 27, the company that specializes in higher-end products such as organic foods said in a statement on Thursday. Sales gained 17 percent to 35.5 billion rand, or 12 percent excluding Australian department-store chain David Jones.

The company’s total food-sales performance was better than the market average, Moir said, as the retailer raised prices by 5.7 percent in the second half of last year. Shoprite Holdings Ltd., South Africa’s biggest food retailer, increased prices 2 percent in the three months through December.

“Food inflation will come through and will come through for all customers,” Moir said. “We will see inflation rise over the six month period we are now in and there is going to be real pressure in the coming 12 months.”

While Woolworths benefits from “customers at the upper end of the market having more disposable income,” even this part of society will cut back on food purchases as prices rise, Moir said.

Dividend Rises

David Jones, bought for $2 billion in 2014, is performing “well ahead of expectations,” Moir said. Woolworths also benefits from the rand’s depreciation relative to the Australian dollar, with 43 percent of operating profits coming out of Australia. The rand has weakened about 26 percent against the Australian currency during the past year.

The company will pay an interim dividend of 1.33 rand, an increase of 38 percent. Shareholders can also choose to take the dividend as a scrip -- or additional shares -- an issue that’s weighing on the share price because some investors’ holdings may be diluted as a result, Kyle Rollinson, an analyst at Avior Capital Markets, said in an e-mail.

“We have got capital commitments going forward, we’ve got the debt levels we already have and it would be more conservative in what is a volatile environment to offer scrip rather than cash,” Moir said. “It allows us to manage our cash flow and our capital more conservatively.”

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