Woolies reports biggest ever first-half profit

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This interview originally aired on RSG Geldsake (in English).

RYK VAN NIEKERK: Retail group Woolworths reported interim results for the six months to the end of December today. Following a flat operational performance in its previous financial year, the group performed well during the period. However, the group states in the results documentation that the results are not really comparable to the previous period, due to the lockdowns that existed in Australia in the previous period.

But officially the group’s turnover rose by 15% to R45 billion. The profit for the year rose 70% to R2.7 billion, and the board doubled the interim dividend to R1.58/share.

Read: Woolies breaks interim earnings record

Roy Bagattini is on the line. He is the Woolworths chief executive. Roy, thank you so much for joining me. I want to start with load shedding. Load shedding in South Africa reduced your operating profits in the period by R15 million a month, or R90 million for the six months. But since then load shedding has increased significantly. How much does it cost you now?

ROY BAGATTINI: Yes, load shedding is having a pretty debilitating impact across the economy, and businesses like ours are clearly very much affected.

Often when we talk about load shedding and the impact, we talk about the direct impact on our retail stores and our retail operations. We omit talking a bit about the upstream impacts on our supplier base.

Certainly the R15 million to R20 million that we talk about in terms of the monthly impact, which is what we are experiencing now, really goes to supporting generators, our diesel costs, and there’s an element of what we call ‘food waste’ in that particular mix. So it is quite meaningful.

But we are working with our supplier base and through our business to mitigate many of these and set up more permanent alternatives as we go forward, given that we don’t think this issue is going to go away any time soon.

RYK VAN NIEKERK: In your food business your competitive advantage is your cold chain. You can keep products cooled from tree to store. How has this been affected, and I assume it ties up with what you’ve just said? Your upstream suppliers face maybe bigger challenges than you.

ROY BAGATTINI: Yes, Ryk. That’s really quite critical to us, particularly on the food side. We don’t see this negatively impacting our cold chain.

That cold chain and the underpin that it provides to the quality offering that we have is sacrosanct to us.

You know that if our cold chain is broken for more than eight consecutive minutes, we then take those products off the shelf or out of the refrigerators and put them into our distribution network.

We accelerate that, and then the food goes to our food banks and charities, but it’s earmarked ‘not for sale’.

So we are very diligent in that and very specific, and in fact we’ve seen customers reward that with the trust that they have in the brand. We’ve actually seen an interesting growth in customers through the recent times of load shedding; customers who may have shopped at Woolies had gone elsewhere but are now returning to Woolies, particularly because of this commitment around quality.

We’ve also invested over many, many years now. Our first generators went into our stores way back in 1998, 1999, and we have 90% of our stores with backup power. So we keep them open, we keep them trading.

That gives us the opportunity to retain and sustain this cold chain, which is so important to the quality credentials that we have.

RYK VAN NIEKERK: Let’s talk about David Jones. You bought this Australian business in 2014 for R21.5 billion. You sold it late last year. You haven’t disclosed the amount of this transaction, but it’s rumoured to be around R1.5 billion, which represents a significant loss. Has the final price been determined?

ROY BAGATTINI: We haven’t disclosed any final sort of details on the transaction yet, Ryk. We’re still obviously trading the business, we still own the business and we’re looking to close out on the transaction, in fact, at the end of this month.

Read: Woolworths finally sells David Jones

So our plans are in place to deliver against that. As you say, this has been a particularly – probably an understatement – painful journey for us and for our shareholders. We’ve addressed that, though, quite emphatically.

We’ve turned this business around in the last two to three years. It is profitable, it is cash-generative, it is self-funding and in fact it’s delivering probably its best profit performance since WHL [Woolworths Holdings Limited], our group, bought it in 2014.

Read: What would Woolies do with R10bn-plus from David Jones sale?

We are going to be realising proceeds that are going to be in excess of the book value, the carrying value, of this business. So it is going to be shareholder-accretive.

Beyond that, very importantly, by offloading the [David Jones] business or selling the business, we’re able to remove about R22 billion of debt or liabilities associated with that business from our balance sheet.

That transforms WHL’s financial profile. We actually will increase our return on capital here by probably more than 500 basis points, and it allows us to invest our time and attention on the higher-yielding businesses here in South Africa, and obviously our Country Road Group business in Australia.

So it’s a transformational move for us, but no doubt very value-accretive for shareholders and great for us because we can simplify the group and really get focused on what makes money for us.

RYK VAN NIEKERK: You say it’s positive for shareholders, but the share price of Woolworths was around R70 when the business was acquired in 2014, and today it’s around R75. It may seem not one of the best investments ever. In fact, some people describe it as one of the most destructive acquisitions a South African company has made in Australia. When you were appointed in 2020, was that your top priority – to sort David Jones out or to sell it?

ROY BAGATTINI: You’re absolutely right calling out the history here, Ryk. I think it’s something that one cannot avoid acknowledging.

It has, as I mentioned, been a very painful process for us. We did destroy, through the acquisition and the consequent investment, significant value for our shoulders. Since 2020 a major priority for me on joining the company was to resolve this. My point that I made earlier on is that we restrategised the business, restructured balance sheets, and we basically turned this business around to enable us now to offload it.

It isn’t a great strategic fit for us and, even financially, even though it’s turning in really good profits, these don’t represent the type of investment we want and they certainly don’t generate the returns that we would expect to see.

We’d rather make those investments in our own businesses back here in South Africa and our Country Road Group business in Australia. So when I say it’s value-accretive I’m saying, as it stands today, as we offload this, this is of significant benefit to our shoulders, given the balance sheet impacts alone.

RYK VAN NIEKERK: Let’s talk about your operational performance during the period. It has been a good period for Woolworths. Can you maybe put it into perspective. We are living in tough times, there are lots of pressures on consumers – maybe not so much at the top end – but how do you think shareholders should look at your operational performance during this period?

ROY BAGATTINI: I think you can see from the numbers we have shared, Ryk – the overall numbers are supported by very strong underlying performances of all of our businesses.

Historically, when we’ve shared results, there’ve always been one or two of the businesses that have been not performing to expectation. We’re in a situation now where the whole portfolio is working very strongly for us.

This is a testament to the strategies we’ve put in place around those businesses, but more importantly our execution, our implementation of those strategies are working very well for us.

And if you look at any of the metrics across the income statement, they’re all really moving very positively in the right direction. As a consequence of that, it sort of cascades through into our earnings per share.

What is very interesting and maybe noteworthy is that these sets of results are the highest interim earnings per share in the history of the company, so really an interesting high watermark here for us.

As I say, we now have the strongest balance sheet we’ve had in the better part of 10 years, having paid off over R12 billion worth of debt.

We’ve also basically revised our dividend policy here, and dividends are up by almost 100% in this interim process.

The other point I’d just like to make is that we’ve also implemented a programme of share buybacks, which have returned significant value to our shareholders through this process.

So a lot is going on both financially and operationally, but we are very confident in our ability to continually find what we call self-help opportunities to drive earnings growth.

The context is challenging, there’s no question. Load shedding will continue to worsen and make it more challenging for us. We have interest rates and inflation, etc, and some of the points you were making.

But we see significant opportunity for us to a large extent to still control our own destiny in this context, and focusing on what we can control is really the approach we take as a business.

RYK VAN NIEKERK: Roy, thank you so much for your time today. That was Roy Bagattini, the chief executive of Woolworths