Woolworths’ multi-billion-rand David Jones blunder

Woolworths’ disastrous David Jones adventure ended with the sale of the Australian retailer eight years after it was bought.

To understand the David Jones debacle, we need to go back eight years to when Woolworths announced the acquisition.

The acquisition formed part of Woolworths’ strategy to expand its operations beyond South Africa and increase its international footprint.

Woolworths planned to become a leading apparel retailer in the southern hemisphere, and buying David Jones was a first step toward this goal.

The purchase price of R21.4 billion was at a 25.4% premium to the AUD$3.19 per share it traded at on the day before Woolworths’ announcement.

For six years after the acquisition, Woolworths pumped billions into David Jones to improve and revamp its stores.

Between 2015 and 2022, Woolworths invested R7.2 billion in additional capital expenditure (capex) into David Jones.

Combining the initial investment and capex shows that Woolworths invested at least R28.6 billion into David Jones.

However, the acquisition did not go as planned. In fact, it became a millstone around its neck instead of being the start of becoming a global apparel retailer.

After the initial acquisition, Woolworths expected David Jones to generate earnings before interest and taxes (EBIT) of at least R1.4 billion within five years.

Woolworths’ expectations did not come to fruition. Five years after the acquisition, David Jones generated an EBIT of R371 million – a far cry from their expected R1.4 billion.

In 2018, Woolworths wrote down the value of David Jones by AUD$713 million as Australia’s tough retail market affected the chain.

A year later, Woolworths disappointed shareholders again when it revealed that David Jones had impaired AUD$437.4 million in the year to June, resulting in the valuation falling to AUD$965 million.

David Jones only generated total after-tax profits of around R6.3 billion throughout this period when Woolworths owned it.

The debt burden created by the David Jones acquisition and subsequent capex outweighed the profits Woolworths received.

In 2014, just before the David Jones acquisition, Woolworths had a total interest expense of R136 million.

This changed dramatically after the David Jones acquisition, as the bulk of the purchase price was financed through debt.

In 2015, a year after the acquisition, Woolworths had a total interest expense of R1.5 billion, which was R1.4 billion more than the year before.

In fact, Woolworths paid a total of R15 billion in interest expenses during the entire period that it owned David Jones.

This amount is more than twice the profit Woolworths generated through David Jones over the same period.

Determining what portion of the R15 billion interest expense was attributed directly to David Jones is difficult. However, given the dramatic increase, it most likely was the bulk of it.

The chart below shows Woolworths’ interest expense before the David Jones acquisition in green and after the acquisition in red.

With billions in impairments, a growing debt burden, and underwhelming profitability, it is hardly surprising that Woolworths wanted to get rid of David Jones.

On 19 December 2022, Woolworths announced it was selling its entire stake in David Jones to an Australian private equity fund, Anchorage Capital Partners.

Woolworths said the disposal of David Jones would remove R17 billion in liabilities from its balance sheet and improve the company’s solvency.

Woolworths did not disclose how much it would get for David Jones.

However, citing people familiar with the matter, Bloomberg reported that Woolworths sold David Jones for around AUD$130 million (R1.6 billion).

This represents a value of R19.8 billion less than what Woolworths paid for David Jones in 2014.

The losses are enormous if one adds the additional R7.2 billion Woolworths pumped into David Jones between 2014 and 2022.

Buying David Jones was, therefore, one of the biggest corporate blunders in South Africa, and Woolworths would certainly ensure it does not repeat it.