Woolworths’ two ugly stepchildren

Despite Woolworths’ food business performing consistently well, its clothing and Australian segments have lagged. Now, investors are considering taking a step back from the business altogether.

Woolworths is one of South Africa’s largest food retailers. It also has a Fashion, Beauty, and Home (FBH) business, as well as a Financial Services segment. In addition, the retailer has an Australian business, the Country Road Group.

The retailer’s latest financial results for the 26 weeks ended 29 December 2024 revealed a mixed performance for the first half of its 2025 financial year.

Its food segment had a strong performance, reporting 11.4% turnover growth and an improved gross profit margin of 24.9%.

In addition, the retailer’s on-demand grocery delivery service, Woolies Dash, saw sales increase by 49.2% and total online food sales rise by 37.2%.

However, the group’s FBH segment performed much worse in comparison, with a reported turnover growth of only 2%.

The Country Road Group, which operates in Australia and New Zealand, saw its sales decline by 6.2%, and the segment’s adjusted operating profit dropped by 71.7%.

The retailer said this is due to weak consumer demand. It explained that the apparel trading environment in Australia and New Zealand remains significantly constrained, characterised by reduced footfall, spending, and intense promotional activity.

Woolworths said the Country Road Group is undergoing significant restructuring to reconfigure its operating model and reset its structural economics as a standalone business.

This comes a decade after Woolworths acquired the Australian company David Jones for around R29 billion, entirely funded by debt.

However, this venture turned out to be a failure. After years of disappointing sales, they sold David Jones for around R1.6 billion.

Even without the David Jones business, the Country Road Group has struggled, and investors are raising alarm bells over the lacklustre segment

Stay invested – for now

Protea Capital Management’s Jean Pierre Verster explained on BusinessDayTV that retailers had a strong run from the last election up to late last year, then came down significantly until about a month ago, when many recovered.

Although Woolworths followed a similar pattern, it hasn’t recovered quite as strongly as its competitors. Verster said this is because the business has some internal issues.

In the first place, its Australian business is slowing down more than people would have expected.

On top of that, the upper-income segment in South Africa, which is Woolworths’ target market, has been under increasing pressure lately.

For example, they have been feeling the pressure of bracket creep. While the 2025 Budget has yet to be finalised, the National Treasury is not expected to adjust personal income tax brackets and rebates for inflation.

Similar to the 2024 Budget, this will leave South Africans a ‘stealth tax’ in 2025’s budget in the form of bracket creep, a phenomenon where inflation-driven salary increases push earners into higher tax brackets.

This effectively raises taxpayers’ tax burden without an official rate hike, meaning that even with a salary increase, many South Africans are in a worse financial position than in the previous financial year.

“It has a few things it needs to fix, and people have been disappointed. They thought it would have been fixed, and they would have done better in Australia in the last year at least, and it hasn’t really happened,” Verster said.

However, he noted that he still sees long-term value in Woolworths shares, as the company is dominant in the market for quality food products.

Although the company may not be at the forefront of the fashion industry, it remains a market leader in high-quality basic clothing items.

“Their moat has shrunk a little bit over the last two to three years. But they still have a moat, I still like the business, and the shares are fair at this level,” he said. If the retailer addresses some items on its to-do list, its shares could perform well.

“So I would stick with Woolies for at least another year if I’ve got the shares, and hopefully, the business can fix some of the small things they need to sort out.”

Time is running out

Benguela Global Fund Managers’ Grant Nader told BusinessDay that Woolworths is a great brand. Their food segment is still a phenomenal business, with margins that are the “best in the game”.

Even though other companies like Shoprite and Pick n Pay are now entering the premium private food label business, Woolworths’ market position is not threatened.

“But, I have concerns around the rest of the business. I think Australia is underperforming,” Nader said. The Australian market is tough, but even relative to peers, the Country Road Group is performing poorly.

“I’m really concerned about what they’re doing there. It’s been the same story over and over. When is the turnaround coming?”

FBH in South Africa looked like it was improving, especially after Roy Bagattini was appointed Woolworths’ Group Chief Executive Officer in February 2020.

From 2021 to 2023, the FBH segment did incredibly well, essentially doubling its profit margin. However, it has since taken a step back.

Nader said Woolworths doesn’t seem to have a clear strategy. Their shops are starting to look like department stores with multiple brands under one roof.

“That doesn’t work. We’ve seen that in the past, a lot of those stores have come and gone. I have some concerns about the strategy and execution. It’s been enough time now that there should be better results,” he said.

“So I’m starting to move to the fences on this one, and I’m becoming cold very quickly unless we start to see some rapid improvement.”