The Company 

Woolworths Holdings is an investment holding company listed on the Johannesburg Stock Exchange that operates through three wholly owned subsidiaries, Woolworths (proprietary), David Jones and Country Road Group, as well as a joint venture – Woolworths Financial Services. Woolworths is a chain of retail stores in South Africa and certain countries in Africa and the Middle East. It offers a range of clothing, food and general merchandise, mainly under its own brand name. The Woolworths unit, comprising own-brand clothing and general merchandise along with the Woolworths food divisions, contributes 57% to the group turnover and 44% of the profit before tax excluding Treasury operations. Food sales make up approximately 36% of revenues and about 24% of pre-tax profits, due to higher clothing margins. The clothing and general merchandise division contributes 21% of Woolworths sales and 38% of profits. Woolworths targets the living standards measure 8-10 groups, and is predominantly a cash-based retailer with approximately 18% of sales on credit. This is a relatively low credit offering in comparison to its South African retail clothing and general merchandise peers.

Country Road is a chain of over 490 stores and concession outlets in Australia, New Zealand and South Africa, offering a range of clothing and homeware. As at the end of December 2014, Country Road contributed 19% to group pre-tax profits and is a significant rand hedge. The business operates under brand names Country Road, Trenery, Witchery and Mimco.

David Jones is a prominent Australian department store chain operating 38 shops. It carries a number of Australian and international clothing brands, beauty products, accessories and other general merchandise primarily targeting the premium and aspirational customer segment. The chain has recently also introduced Woolworths and Country Road brands into their offering. With annual revenues just under A$2bn, David Jones contributes 31% of revenue to the Woolworths Holdings consolidated business and is likely to contribute 35% of pre-tax profits.

Woolworths Financial Services is operated jointly with Absa Bank. Woolworths owns 50% (less one share) and the profits are equity accounted in the Woolworths Holdings accounts. Woolworths Financial Services provides a credit offering to assist customers to purchase merchandise in the stores. It also offers a credit card, personal loans and insurance products to qualifying customers. Woolworths Financial Services contributes 4% to profit before tax.

As at the first half of 2015, the company owns 654 Woolworths stores, of which 87 are beyond South Africa’s borders, 38 David Jones stores and 492 Country Road stores, of which 74 are in South Africa. In the last five years, Woolworths has achieved an average sales growth of around 22.4% (13.8% excluding David Jones impact) per annum and annual profit growth of around 22%. The expansion of Woolworths operating margin has largely been attributed to the firm’s combination of price, innovation and quality.

Development Strategy

The growth in the South African food business and Country Road will continue to drive earnings over the next few years. The increasing basket size in food, with a greater share of non-fresh groceries, and growing upper-market sales with the Country Road, Trenery and Witchery brands for clothing are still key over the short to medium term. David Jones will be a spring board to the Australian market with both a clothing and potential food offer.

We believe the determinant of the value will be the achievement of increased earnings from David Jones within the next few years, and then expanding the offering both in store base and in product range. Furthermore, Woolworths has other levers such as extra margin gains, cost savings and efficiency benefits that have still not been factored into the earnings and hence presents further room for future growth.