A Woolworths' store (supplied)
A Woolworths' store (supplied)
  • The investment firm Allan Gray has hiked its stake in Woolworths to 20% this week.
  • Woolworths has lost two-thirds of its value over the past five years, and is saddled with a debt burden of around R12 billion – amid a global pandemic.
  • But Allan Gray believes it's on the right track to achieve a turn-around in Australia, and that its local food business is "brilliant".
  • For more articles, go to www.BusinessInsider.co.za.

The investment firm Allan Gray, on behalf of its clients, increased its stake in Woolworths to a significant 20.09% this week, a holding worth almost R7 billion.

This comes as Woolworths is trading at around its lowest levels in almost a decade. Its shares lost more than two-thirds of their value since the company bought the Australian department store chain David Jones for R21.5 billion in 2014.

Woolworths' share price over the past five years.

It has since spent billions more in sprucing up David Jones, most notably a R2 billion refurbishment project of the Elizabeth Street department store in Sydney. But its Australian venture has so far been a disaster, and large losses have forced Woolworths to write down R12 billion of the David Jones investment. 

Woolworths is now stuck with a total debt burden of around R12 billion – amid a global pandemic.

In South Africa, where it wasn’t allowed to sell clothing for the first part of the national lockdown, its fashion, home and beauty sales fell 8% over the past year. Sales at David Jones declined 6% and its Australian clothing business Country Road took a 14% hit over the past year.

But Woolworths Food shone: Sales rose almost 9%, with online food sales up almost 88% in the past six months.

Woolworths Food is a brilliant business, says Duncan Artus, the new chief investment officer at Allan Gray. On its own, the food business generates around R2.5 billion in operating profits a year.

Even amid the pandemic, food sales are still doing “very, very well” – and he believes that the company is moving in the right direction with its other businesses as well.

Artus says Woolworths – now worth only R34 billion, from more than R100 billion five years ago – offers solid value. Its shares are trading at around 10 times its historic earnings (and only seven times its earnings from 2015), compared to the JSE average of around 14 times.

Allan Gray CIO Duncan Artus

Currently, there is no value – or even a negative valuation - placed on the Australian business by the market, says Artus.

But he believes that David Jones is on the right track, and supports Woolworths’ strategy of reducing space in Australia by only keeping the strongest stores.

Recently, Woolworths sold a single David Jones store in Melbourne for R1.4 billion, which will make a significant dent in the company’s Australian’s debt burden of around R6 billion. (Woolworths’ large debt burden does not scare Artus. The Australian debt is ring-fenced, and there are no issues on the SA balance sheet, he says.)

The other problem for Woolworths is its sluggish non-food sales in South Africa. Artus expects that Woolworths clothing sales – which were already struggling before the coronavirus crisis - will suffer a “terrible” six months because of the pandemic.

He believes that Woolworths’ attempts in recent years to sell more fashionable clothing misfired, and that it will return to more “core items”, which would appeal to the large target market of the group, thirty-something women.

Artus says that Woolworths new CEO, former Levi Strauss executive Roy Bagattini, is “saying the right things”, and has the “right plans in place” to turn the clothing business around.

READ | What you need to know about the new Woolworths CEO, who's from Joburg and runs Levi's in the US

In the past year, the clothing business’ operating profit was 30% below levels seen in 2017. Once the economy has normalised, and with the right plans in place, clothing could return to previous profit levels, Allan Gray believes.

The investment house is not alone in its confidence in Woolworths. The Public Investment Corporation, which manages civil servant pensions, recently hiked its stake in Woolworths to 15%.

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