Woolworths Holdings Limited (WHL) Earnings Call Transcript & Summary

Well, good morning to everyone, and welcome to our results presentation. Joining me today is Reeza Isaacs, our group CFO, and he and I will be taking you through the group's performance for the past financial year 2020 and providing you with some broader perspectives on our business. As you're aware, I joined the company just on -- 6 months ago after living and working abroad for more than 20 years. And I have to say, not only is it great to be back in South Africa, but I'm also really looking forward to leading the group through what is and will undoubtedly continue to be a uniquely challenging and defining time for the organization. When I joined in February, no one could have predicted what has subsequently transpired or envisaged the uncertainty and the volatility that would ensue. I, for one, had a very different initial 100-day plan in mind. I had contemplated or taken into account a lot of things, but certainly, not a global pandemic. COVID-19 has compelled us to dramatically shift our focus to address the immediate challenges created by the impacts of the virus. During this time, our primary focus has been on the health and wellness of our people, the safety of our customers and also on the protection of jobs for our employees. In line with South African lockdown regulations, Woolworths SA closed all of its non-Food stores. And in Australia, we closed all of our 360 Country Road Group stores for about 8 weeks. In fact, all our stores across both David Jones and Country Road are currently closed in the state of Victoria due to the state governments extending their lockdown period through to the 26th of October. In addition, we've had to close stores on almost 200 separate occasions to implement deep cleaning and safety protocols as a result of either customer or staff infections. And that brought with it significant logistical and operational challenges, which our store teams and our supply chain organization did a great job in managing. We've also transformed our ways of working across our corporate head offices and through a remarkable team effort, we enabled more than 3,000 employees in South Africa and more than 1,300 employees in Australia to work from home effectively. The pandemic has certainly thrown many curve balls our way, but it has given me the unique opportunity to develop a deep appreciation for our company's culture and its character. I've worked in many organizations across various industries globally, and I've been truly heartened and impressed by what I experienced across all of our businesses. This group is so much more than simply a business. It has real purpose, a purpose that is centered around making a positive and enduring impact on people's lives, and that purpose and commitment is underpinned by a value system that is genuinely informed the way in which we have responded to this crisis. The way in which our teams have supported each other, their customers and their communities with grace and selflessness has been truly inspiring. And I would like to thank our 45,000 employees across all of our markets for their courageous efforts and their unwavering commitment to serving our millions of customers every day. Also, a big thank you to our loyal customers and our new customers, who have been very understanding and accommodating of some of the operational challenges that they have continued to remain fully supportive throughout this period. Across our geographies, the impact of COVID-19 has significantly impaired economic growth and consumer confidence. You are as painfully aware of what these pictures say as I am, and no need to dwell on this, but South Africa is facing a death trap. Unemployment is at record highs and consumer confidence is the lowest it's been in decades. We're also seeing Australia into its first recession in 30 years as a result of COVID-19. Looking at the past year, it has been an exceptionally challenging one, characterized by 2 distinctly different halves and equally distinctively different performances between the discretionary and nondiscretionary businesses within our group. Regarding the performance of our SA Food business, it has been exceptional. Once again, we've grown market share, and we have been doing this year-on-year since 2011, 9 consecutive years. The business really played to its strength during COVID, and we know that, that strength and robustness is the result of years of focused investment and a deep commitment towards building a truly world-class food proposition and experience for our customers. The trust in the brand has remained steadfast and, in fact, strengthened during this period. In terms of our FBH business in South Africa, this business had been performing below expectations as we headed into our second half, and this trend has been exacerbated by the pandemic and the resulted lockdown restrictions. I fully acknowledge that the results of the FBH business remains disappointing and have been so for several years now. I plan to share some of my perspectives on this with you a little later on. COVID-19 also significantly impacted Woolworths financial services. The lower book and revenue growth was in part due to lower nonessential spend and lower interest rates, but also compounded by rising impairments as collections deteriorated. David Jones started the year on a promising note, aided, to some extent, by a positive uplift from the refurbished Elizabeth Street flagship store. However, the Australia bushfires and the subsequent onset of COVID-19 negatively impacted footfall, tourism and sales, particularly in the CBD areas, all of which contributed to David Jones delivering an EBIT loss for the year. The performance of the Country Road Group was also materially impacted by the pandemic. Given the challenge of managing social distancing protocols in these smaller format stores, we made a very difficult decision and in the interest of our customers and employees to close our stand-alone stores in Australia and New Zealand for 8 weeks. This negatively impacted results, despite the strong performance of the Country Road brand and our strong online business. The pandemic has galvanized our teams to safeguard the future of the company, and to this end, we have successfully undertaken numerous initiatives to stabilize our business, protect liquidity and strengthen our balance sheet. We have achieved what we set out to do. Through very focused and deliberate cash generation and cash preservation efforts, we have improved liquidity, reduced our net debt, and we've been able to protect the financial position of the group. It is imperative, though, that we use this opportunity to strengthen our organization, and this requires us to actively learn from this crisis, reassess our strategies, particularly in the context of a fast-evolving customer shopping ecosystem. And here, I'm referring specifically to things like the accelerated shift to online and the accentuated levels of digital engagement with our customers. I'll share more of this thinking with you later, but now I'd like to hand over to Reeza to go through the details of our financial performance.

Thank you, Roy, and good morning all. I will run through the financial overview section focusing on key call-outs. There is a lot more detail in the appendix in the back of your packs. Also a reminder that we adopted IFRS 16 this year on a modified retrospective basis without restating the 2019 results. The prior year also had 53 trading weeks. This happens every 6 to 7 years. And to facilitate comparison, 2019 is presented on a 52-week basis and excludes the impact of IFRS 16. All IFRS 16 information is provided in the back of your packs, including the balance sheet. As Roy said, it was a very unusual and challenging year, characterized by 2 distinct halves and significantly distorted by the expected and disruptive impact of COVID in the second half. To recap, in the first half, we delivered adjusted profit before tax of ZAR 2.4 billion, adjusted diluted headline earnings of $1.79 per share, and we declared a dividend of $0.89 per share. Post the half, we provided regular updates. With the last trading statement, we also gave you EPS ranges. We are in the middle of that. So hopefully, no surprises today. Focusing on the second half column, group sales was down 4%, and within that, Foods, which made up about 50% of group turnover, was up 13%. So by reduction, apparel sales were significantly down in the second half due to COVID. EBITDA was down nearly 50% for the half and adjusted diluted HEPS was down 90%. From a dividend point of view, we will not be declaring a final dividend in respect of 2020, and an appropriate sustainable capital structure will be an important consideration in any subsequent dividend declaration. We have undertaken numerous initiatives to stabilize operations, improve cash flows and strengthen our balance sheet. Our teams across the group do a phenomenal job in generating and preserving cash and improving our liquidity position with net gearing below last year and well within facility limits. We are very pleased with where we have landed. The impact of COVID on sales performance. These graphs do not have any x or y-axis but does graphically show the impact of the pandemic on sales within our segments. In SA, the contrasting performances of FBH and Food is evident before, during and after the various stages of lockdown. We saw a spike in clothing sales after we're in from level 5 to level 4, helped by pent-up demand for winter essentials. And in Food, a big spike pre-lockdown was stockpiling and then dropping off, but staying consistently above 2019 levels during level 4 and level 3, notwithstanding that we are not allowed to trade certain categories. Moving to Australia at the bottom of the page, David Jones traded through and performed reasonably in line with 2019, even after Asian tourism stopped, but one can see the decline post-social distancing and restrictions on movement and then the pickup subsequently helped by promotions and clearance. Country Road, a similar pattern but the drop-off more pronounced as we elected to the closed stores for 2 months, with sales coming from online, David Jones and David Jones online. Overall, there was a high level of markdowns in our discretionary businesses during the period, which is evident through the declining margins, which you will see later. But we were encouraged by our ability to stimulate demand through this period and not just through clearance. We also saw a significant uplift in online, notwithstanding the work that we still need to do in this area and investments required to fully exploit the opportunities here. H1, H2 and full year sales performance. This is another representation of trade for the year, showing H1, H2 and full year for each of the segments, essentially putting numbers to the previous slide. We have shared the H2 sales breakdowns with you in our trading update. So you have the details of the first 9 weeks, the second 8 weeks and the last 9 weeks sales growth for the second half. FBH was down 24%; David Jones, 17%; Country Road was down 25% in the second half; and Food was up 13.3% for the half. I will expand this slide a bit later. I'm sure you'll be interested in what -- how we are currently trading, and I'll give you an update on trading post year-end. H1, H2 and full year EBIT. Sales performances in the previous slide translated into EBIT performances as detailed on this slide. I'll unpack this a little later by segment, but here one can clearly see the drop-off in the discretionary businesses' performances in H2, which resulted in losses in the second half. FBH and Country Road still managed to post full year profits, but David Jones made a $33 million loss for the year. Foods, the standout performer, nearly 30% increase in earnings for the second half, delivering ZAR 1.5 billion of operating profit for the half, and ZAR 2.7 billion for the full year. This is an important slide. What we show you is the estimated impact of COVID on performance for the half. These are, of course, based on certain assumptions. Clearly shows that the biggest cost of the group has been the lost sales in the discretionary parts of our group. We start with the impact of lost sales and also lower margins in FBH, DJ's and Country Road of ZAR 3.6 billion. Then the incremental uplift from Foods of ZAR 350 million, not adjusting for lost Food sales from store closures or from certain categories not being able to trade. COVID-related cost estimated at about ZAR 100 million. These include PPE costs, cost of cleaning stores that were shut due to COVID and additional investments made to support our front-line staff in South Africa in recognition of the significant sacrifices they have made in continuing to serve our customers through this very challenging time. Rent relief and other savings. These are the concessions that were agreed to by landlords as well as a deliberate pullback in discretionary costs. Government support across both regions, about ZAR 650 million. These are the months that were secured in terms of JobKeeper relief programs in Australia and the UIF scheme in South Africa to give us an estimated net reduction in EBITDA of ZAR 2 billion as a result of COVID. The group income statement. This is a full group income statement, a combination of statutory and a segmental view and a reconciliation from adjusted EBIT and adjusted profit before tax to profit after tax. Adjusted EBIT was down 37% to ZAR 3.6 billion and adjusted PBT was down 46% to ZAR 2.5 billion. There was some deleverage through the finance cost lines. Finance costs for the group was marginally higher than last year. We had lower gearing and base rates, offset by higher margins in Australia, and there was also a translation effect with the weaker rand. What I wanted to do on this slide is focus on adjustments and tax in the right-hand side call-out box. In terms of impairments of ZAR 305 million and other lease charges of ZAR 267 million. COVID reduced expected cash flows, which necessitated an assessment of the carrying values of assets, including the IFRS 16 right-of-use assets relating to leases. This resulted in certain store assets being impaired. And then in terms of the ZAR 506 million deferred tax adjustment, we did not recognize deferred tax on assessed losses in respect of certain entities. Accounting convention requires that we consider the coverability of assessed losses using no longer than a certain projected period. Considering the uncertainty and potential volatility emanating from COVID, both in quantum and timing, we took a conservative approach in not recognizing the deferred tax assets. Bearing in mind that the assessed losses would also have been impacted by previous impairments and also note that the assessed losses remain available for setoff against future taxable income. This approach resulted in our group effective tax rate increasing significantly to 53.5%. The group's adjusted effective tax rate at the bottom of the slide is marginally lower than the prior year. EPS, HEPS and adjusted diluted HEPS, I won't spend much time on this particular slide, but it's a particularly useful reconciliation from diluted EPS to diluted HEPS to adjusted diluted HEPS. And then, of course, adjusted diluted HEPS post-IFRS 16. The IFRS -- the impairment impact is $0.315 per share. This is a capital item so adjusted for getting to headline earnings. And then adjustments of $0.787 per share related to owners leases and deferred tax as detailed in the previous slide. Then getting on to the segmental results, starting with FBH. We have separately shown the H2 results, given that we've already reported on H1 and the significant impact of COVID on H2. And we've done this for all the segments. A disappointing first half for FBH, exacerbated by COVID in the second half. Sales in the second half was down 24%, with full year 10.7% down. Post lockdown, traders focused on generating cash, reducing inventory. The team did a very good job in pulling back intake and clearance with stock levels 18% down on last year. Clearance and promotions obviously impacted gross margin, which was down 350 basis points to 44%. Expenses were down on last year with savings from both store and other operating costs. Adjusted EBIT was down 60% to ZAR 683 million. Wools Food. Foods had a very good first half, and this performance accelerated in H2 with stockpiling in March and April, and the positive momentum really continuing post that. The business played to its strengths and enhanced its reputation during the period. Sales grew by 13.3% in H2 with full year growth at 10.7% significantly ahead of the market. This has been another remarkable period for Foods, which has posted an unbroken run of market share gains since September 2011. This was achieved notwithstanding the constrained environment, restrictions on trade and the closure of stores where we had COVID incidents. GP margin was marginally higher than last year, but we did not pull back on promotions or price investments, with the surge in demand translating into better waste and higher volume rebates from suppliers. Overall EBIT margin of 8.4% in the second half, all from positive operating leverage with an operating margin of 7.7% for the full year, a really outstanding performance. The financial services book grew by high single digits in the first 9 months pre-COVID, but it was up only 2% at year-end, highlighting the impact on the business. Lower interest rates and the closure of stores affected transactional revenue and collections. The impairment charge was also nearly double that of the previous year from the deterioration in collections as well as a much higher IFRS 9 macroeconomic overlay. The impairment to book was 7.9% compared to a pre-COVID rate of 4.2%. It was still well below that of our peer group, and remember, this includes collection costs. The deterioration in the revenue and collections resulted in a loss for the half of about ZAR 160 million, but the business still delivered a profit of ZAR 280 million for year. Overall, a credible performance in a very tough environment. While most David Jones stores traded through the second half that there was a significant decline in footfall, which began earlier in the half with the bush fires and the drop in Asian tourism from February onwards. The completion of Elizabeth Street in April contributed to an uplift in sales in the fourth quarter. Trade has been encouraging. However, it's still to reach its full potential, given the COVID context and the low footfall we continue to see in CBD locations. The team also did a good job in managing inventory, but this impacted GP margin, which was 270 basis points down, with this decline coming mainly from own buy. Costs reduced by 4.5%, helped by JobKeeper and rent concessions. Financial services remained a positive profit contributor, and the Amex partnership continues to perform strongly for us. Overall, a loss of $53 million for the half and $33 million for the full year. Country Road, stores were closed for about 8 weeks. Sales in the second half declined by 25% and ended the year 14% down on 2019, an above-market performance from the Country Road brand. Online sales were also strong, growing by 28% and contributed 1/3 to total sales in H2. Inventory was again well managed, but clearance resulted in GP margin declining by 310 basis points for the year to 58.6%. Expenses for the year was down 11.3%, also helped by rental concessions and JobKeeper. EBIT was down 60% to $40 million with an operating margin of 4.3% for the year. In line with the imperative to reserve cash, CapEx was pulled back by ZAR 500 million in H2. Total CapEx for 2020 was $2.5 billion, of which $97 million was sent on Elizabeth Street. The projected CapEx for 2021 is also significantly down, about ZAR 1 billion on what we've previously guided to. This is informed by a reduced store footprint and a deliberate pullback in noncritical CapEx. For SA, our base CapEx will be more or less at the same levels as 2019 and 2020, with a disproportionate investment in digital, data and online. Our base CapEx in respect of David Jones ticks up from $26 million to $37 million. As we start the refurbishment of Bourke Street womenswear and we continue to invest in digital, online and customer loyalty. Country Road CapEx is down next year, given where we are in the cycle and also due to the targeted space reductions. We are also not pulling back on online, digital and continue to invest in these initiatives. Moving on to the balance sheet. As a result of COVID, we accelerated key projects to build a more resilient business, which includes strengthening the balance sheet. I won't repeat what is in the call-out boxes here. This is clear in terms of the explanations on inventory, accounts receivable and accounts payable. Overall, an outstanding working capital outcome across the group. Shareholders' funds are at ZAR 10.8 billion. This is obviously pre-IFRS 16, with a net debt-to-equity ratio of 1.1x. Total gearing having reduced to ZAR 11.6 billion. We remain committed to reducing overall net gearing to 1.5x net debt to EBITDA. In SA, the underpinning of the Foods business, together with suspending the dividend, places us in a relatively strong position from a capital structure point of view. Net gearing at year-end reflects the focus on cash and liquidity with both SA and Australia below our expected position and last year. The lower gearing was achieved notwithstanding the tough environment and the CapEx in respect of Elizabeth Street. The net debt in Australia was refinanced in the first half with an extended maturity profile, and liquidity continues to be closely managed with an adequate level of committed facilities. As mentioned, there are several initiatives currently in flight that are aimed at reducing gearing, such as the sale of properties in Australia. Bourke Street menswear building was successfully concluded, $421 million. This was a good outcome, and we achieved a sale price in excess of what we initially estimated. We recently received nonbinding indicative offers for our remaining David Jones properties, which we are also in the process of evaluating. On the right-hand side of the slide, we were in excess of our Australian covenant limits at the end of June due to COVID with net debt-to-EBITDA of 3.1x and a fixed charge cover ratio of 1.3x. However, we achieved the suspension of covenant testing for June and December and made a $75 million facility available to its Australian businesses in the form of a second lien alone. And just again to clarify and remind you of covenants and commitments as they relate to the group. We have 2 separate covenant groups: one for South Africa, one for Australia. These are ring fenced, and there is no recourse or cross guarantees between the 2 from a funding or a lease perspective. The only cross guarantee that exists is between Country Road and David Jones, and this is only in respect of the bank and bondholder debt. Cash generation. We have split this between H1 and H2, given the significant focus on cash in H2. Cash generated from operations in H2 was ZAR 1.4 billion and the improvement in working capital was contributed about ZAR 1.6 billion to the overall net cash position. The dividend was in respect of the first half, a dividend of ZAR 858 million, and gearing was reduced by ZAR 900 million through a very tough operating period. Liquidity. We haven't shown this before, but this is also an important slide. As a result of COVID, we reassessed our forecasted liquidity and covenant positions in both South Africa and Australia in April this year. At the start of the pandemic, here we show SA on the left and Australia on the right, the Australian gearing position was forecasted to peak in April with winter intake and also on completion of Elizabeth Street. At that point, and based on a potential downside scenario, the Board decided to make the $75 million available to the Australian group to ensure adequate headroom through the crisis. This was also done to facilitate the covenant waiver process with lenders. And as you can see, we exceeded our cash flow forecast with the Australian net gearing well within the facility. These numbers obviously exclude the $121 million proceeds that I referred to earlier from the sale of Bourke Street men's, which was received in August. While the provision of funding to support the Australian businesses remains in place, there has been no need to call on this funding, and this is not expected either. Then just to give an update on recent trading. This is an extension of the slide on H2 sales presented earlier. And in this slide, we have added the post here in 10-week trade figures. FBH traded down 21% for the first 10 weeks of the year, 9.4% lower than the sales rate for the last 9 weeks of FY '20, which included a significantly high level of promotions versus the previous year. The sales size and phasing has also impacted growth rates, with the sale being much smaller and phased over a longer period to achieve a better sell-off. The longer sale resulted us in delaying summer launch and this, together with negative price movement due to price investment and mix, is also impacting growth rates. Price movement is expected to be minus 1.7% for the half. Moving on to Foods. Foods was up 13.9% for the first 10 weeks of the new financial year. Sales continued to benefit from the consolidation of spend, despite some easing in lockdown restrictions. Price movement is expected to be 6.8%, and this reflects the bigger pack sizes and mix. Does appear high, but I think a good explanation for that. David Jones and Country Road, still negative growth rates due to COVID, lower footfall, especially in CBD locations and due to the Victoria State and New Zealand lockdowns recently announced, but also an improvement in H2 growth. And in the case of Country Road, a better run rate in the last 9 weeks of H2 with online and the Country Road brand continuing to perform well. Thank you. I'll now hand back to Roy.

Thank you, Reeza. Prior to COVID-19, the retail industry was already having to contend with several significant challenges. Amongst these, we were seeing the growing proliferation of choice for customers, also the growing demand for convenience and the dramatic shift into online shopping. We're seeing a marked shift in how customers shop, and how they want to engage. And these trends have been accelerated and accentuated under COVID, and we anticipate that they will endure and continue in a post-COVID world. If we take a specific look at the impact of COVID-19 on our customers' behavior, what we're seeing is that customers have shopped less frequently, albeit for bigger baskets. And when they shopped, they did so during less busy times or at smaller stores closer to home. It really is interesting that only 5% of our customers claim to have no behavior change at all. We have seen a seismic shift to digital engagement across all generations, more generally in e-commerce, but specifically through mobile. 14% of our customers started shopping online for the first time, and 25% say they are now shopping more online than they did before. If we take a look at the graph on the right, at what influenced choice of store, safety protocols, stock availability and proximity to home have been the top 3 drivers determining where customers decided to shop. Interestingly, price and promotion became less of a factor, although we're seeing that change as lockdown restrictions ease. So what have we learned from this? And how do we use these insights? We know customer behavior is changing and that we need to understand and respond to that change, not just endure the impact of the pandemic, but because we're determined to emerge from this, both strategically and operationally much stronger. We're shifting how and where we allocate capital increasingly towards our digital transformation initiatives. We're taking a hard look at our store portfolio to rightsize our physical footprint while still driving convenience channels. We're also challenging ourselves on our value proposition, and how we defend our existing market share, whilst at the same time, focusing on capturing opportunities to grow share. We're also amplifying our sustainability efforts through our good business journey strategies, not only to reinforce our commitment to making a positive impact in this important area, but also in support of our vision of being one of the world's most responsible retailers. If we move to Australasia, going into half 2, the David Jones business was trading largely in line with expectations, and we're seeing progress in a number of areas. The performance of the redeveloped Elizabeth Street store was and is encouraging and is now arguably considered the benchmark expression of retail in Australia. We are taking the relevant learnings from Elizabeth Street, such as the approach to the curation of exclusive brands, and specific customer experience and service elements, and selectively deploying those across the rest of our store portfolio. So although some progress has been made, our David Jones business has simply not transitioned fast enough. While it's arguable that some of its challenges have been more structural, there are several identified opportunities to improve performance, including the way in which we trade the business. I fully appreciate the scope of the challenges here and the broader impact on the group, and I'm working closely with the team in executing our near-term plan, but also in determining the best way forward for that business. The Country Road Group brands are now exclusive to David Jones, following their exit from Myer. Our refreshed Country Road product is also performing exceptionally well and certainly significantly ahead of the rest of the portfolio. Both businesses, David Jones and Country Road, are delivering really strong digital performances, too. Given the significant negative impact of COVID-19 on overall business performance, it became evident fairly early on that we would not meet our covenant commitments. To address this, we engaged with our lenders and successfully secured covenant waivers for 2 subsequent reporting periods. To assist with this process, WHL provided a loan facility by way of a second lien of $75 million. And as Reeza has pointed out, we are pleased to report that, that facility has not been required. I want to spend some time on this point. One of our most important priorities is unlocking value in our Australasian businesses. As a starting point, I want to confirm that there will be no further funding from here into David Jones. In fact, our intention is to do the exact opposite, which is establishing a care pathway to return value to WHL. We're undertaking several initiatives to do that. Firstly, we are making good progress on our capital plan. We sold Bourke Street menswear store for $121 million and are using those proceeds to pay down debt. We're also very encouraged by the strong level of interest we've received so far from several parties for the remaining DJ properties as we look to realize value there, too. Secondly, our discussions with landlords to reduce space, to reduce occupancy costs and to increase flexibility are progressing well. We've guided previously to a reduction of greater than 20% of our GLA and that ambition remains. But we're going after it now in a much more accelerated way, while still being clear that we're not prepared to incur unnecessary exit costs that will be value dilutive. Our approach is being well thought through, and that needs to be, given the interdependencies which exist between our capital plan and the rationalization of our footprint. Thirdly, we're commencing a range of cost-out initiatives to take at least $20 million of costs out of the Australian businesses on an annualized basis. These are savings that we expect to flow directly to the bottom line. Finally, we're undertaking a comprehensive review of the DJ's food business. Our partnership with BP is tracking very well and certainly presents an attractive opportunity for us, but the larger format foods offering has been loss-making now for too long. It suffered a $14 million EBITDA loss this year and we're simply not prepared for that to continue. We're making good progress in finalizing our approach to this, which at a minimum will get DJ Foods to a breakeven position during the 2022 financial year, and I look forward to sharing this with you. Moving on to our FBH business. As I mentioned earlier, the performance of FBH has been disappointing for some time now, and this has frequently been attributed to poor execution. And whilst I think there is an element of that, it is my strong belief that our challenges lie as much in strategy as they do in execution. As a business, we have not evolved fast enough, and that's left us somewhat behind the curve. We have vacillated between focusing on our heartland customer versus the new and emerging customer, which has meant we've missed opportunities in both respects. Our lead times are longer than they need to be and lack the flexibility and agility we need to be able to react to customer trends in a timely manner. While we're often described as a broad church in respect of our offerings, the fact is our range of private label brands are not distinctly different enough from each other. And it's because of that breadth of assortment, economies of scale are nowhere near where they need to be. As a result, from a customer perspective, our positioning is unclear and confusing. We are regarded for our quality essentials, but are also viewed as too expensive and certainly not stylish enough. We need to take a much more targeted approach in positioning our brands in the market. Many of you will know that Manie Maritz has recently joined to lead our FBH business, and I am certainly looking forward to supporting him as we work to reposition this business to achieve its full potential. To that end, we are undertaking a holistic review of the strategy. We are clear that we need to be more deliberate on the role that our brands need to play, what they stand for, what categories them as playing and at what price points, and in particular, how we bring them to life in our stores and online. As a start, we need to ensure we've got the relevant capabilities and competencies in our team to fix what we've got, but to also to go after more. Regarding supply chain, there's more we can do to optimize that. Currently, 50% of our product is sourced from SADC, and I believe there's more we can do to leverage greater agility and flexibility going forward. In addition, we are determined to capture a greater share of beauty, where we're already building momentum. We also want to build on the momentum in home, particularly in our online channel. It is also imperative for us to actively reduce our space wherever it makes sense to improve our productivity metrics. Notwithstanding these other initiatives, we will continue to drive our Food business. It is our star performer, it has underpinned group results, and it also has a very special place in the hearts and minds of our customers. Having spent most of my career outside of South Africa across multiple geographies, I can quite frankly say that there are very few food businesses globally that rival ours. A business like this is not something established overnight or even over years, but built over decades through relentless focus, continuous improvement and leading innovation. This is true testimony to the capability that exists across the breadth and depth of our food leadership team. We are focused on protecting and actively growing market share. In fact, I'd go so far as to say, our team is obsessive about market share. Integral to that is our leadership position in quality and innovation. We will continue to invest in that regard. In any year, up to 20% of our products are new or enhanced, and you can continue to expect that from us. Innovation is core to our DNA. It's part of our culture. It's not easily replicable. One of the areas that sets us apart from our competitors. We are aware, though, that we need to make our offering more accessible to more customers, while still remaining true to that DNA. Part of that is about driving convenience, but part of that is also about price, and we're pleased to announce that we're looking to invest over ZAR 750 million in price over the next 2 years. We will work closely with our suppliers as we do that. They have been pivotal to our success and are a key advantage to us. I'd like to say a particular thanks to them for the agility they have demonstrated during the past several months. We continue to protect and grow these relationships, which, in some instances, go back more than 50 years. Underpinning the brand equity in our business is our good business journey. Our focus on sustainability is fundamental to us and is a distinctive competitive advantage for the group. For example, we have made significant progress against a number of commitments to reduce packaging across our business. Today, 19 Woolworths full-line stores and line food markets as well as one David Jones food store are now entirely plastic bag free, and we'll continue to drive this initiative. We also continue to focus on responsible sourcing of commodities in our fashion businesses with 92% of FBH and 80% of the Country Road Group's cotton now being sustainably sourced. We are also celebrating the 10th Anniversary of a pioneering Farming for the Future program, which is focused on growing food in a more sustainable way. We have made progress on numerous other initiatives and will continue to do so as we set our new sustainability targets for 2025 and beyond. We are in the process of laying the foundation for data-driven decision-making across the group. We have always had good information at a transactional or product level, but we've lacked the ability to analyze at a detailed customer level. Last year, we started the journey to leverage cloud-based capabilities. We are reducing our reliance on third-parties and developing ways that enable us to rapidly evolve our models as the environment changes. We now have a deep understanding of our customers. We understand who is buying what, in which stores and are also starting to understand why. Our first step was to get our data foundation right. We've done that. Our next step is now to leverage that throughout the organization. So that data and analytics genuinely informs our product decisions. It informs our store and channel decisions. It also identifies error for greater efficiencies and growth. By way of an example, we're looking to modernize and enhance our food demand forecasting and planning capabilities. We are embarking on an AI and machine learning proof-of-value initiative, using new technologies and analytics capabilities to determine how we could improve on-shelf availability of our Foods products for our customers. In addition to embedding data analytics across the group, we're also fast-tracking our omnichannel capabilities. Even prior to COVID-19, our Country Roads Group business in Australia had been delivering market-leading digital performances, and David Jones was starting to see the benefits of its new online platform. In South Africa, however, our e-commerce offering was fledgling, and to be candid, we were caught a little short during the pandemic. Now I know a lot of you are customers of ours, and I appreciate that, but I also fully understand the disappointment you have when your online order takes days to be delivered or the next open delivery slot is more than a week out. This can be very frustrating. I have received your explicit and very flowery e-mails in this regard. So thank you. You're right. There is a lot of work for us to do, and we're getting after it. As part of building out our online service offering, we accelerated the launch of our Click & Collect capability and have very quickly rolled this out to more than 60 stores nationwide. We certainly have our work cut out for us and there is a big agenda, but we are clear that we need to fast track our omni capability and put the resources behind those initiatives that not only support but really transform our business, leveraging learnings from across the group. Our approach to this will include an initial phase where we establish a solid foundation to close the service level gaps. We also look to leapfrogging our competitors to offer unique customer experiences, while at the same time, developing advanced fulfillment and order management capabilities. So as we conclude, we are yet to feel the full impact of the pandemic on livelihoods across all of our markets. The government-initiated programs have, to some extent, mitigated economic fallout, but that's coming to an end. The outlook in South Africa is particularly concerning, given our starting point in terms of unemployment, whilst many Australians now are facing the prospect of an economy that's in recession. Across the group, our teams have been responding to some of these challenges, and I would like to share one of the initiatives that our South African team has done in partnership with an organization called the Gift of the Givers, and other partners to support food relief across the country. [Presentation]

A really moving video, which highlights some of the biggest challenges South Africa faces as a country. As a corporate citizen, we are acutely aware of the responsibility we have to the broader communities we serve, and that is a responsibility we do take very seriously. Looking forward, the environment remains highly fluid, highly unpredictable, and we've got the added headwind now in South Africa of a resumption in load shedding. In terms of the trading environment, we expect promotional activity to intensify as price reemerges as a key determinant of shopping behavior. Our current financial year is again likely to be a tale of 2 businesses. Apparel, beauty and home businesses are expected to show some recovery over the full year of a weakened base, whereas, food is going to be up against tougher comparators, especially into the second half. You'll notice, we have not provided any medium-term targets. That is a deliberate decision, given the volatility and the uncertainty of the current COVID context, but you can expect us to provide you with transparent guidance as soon as we're in a position to do so. The starting point for me has really been to understand what some of the challenges in our businesses have been and to be brutally honest about that starting point. We've done a deep diagnostic, and what I can tell you is that without undermining the work that needs to be done and in instances, some of the tough decisions we need to make, I don't see anything ahead of us that is insurmountable. There are some easy wins, which we've already identified and are going after, but there are also some bigger challenges that may take a bit more time but with bigger payback, and we're going after those 2. We are in the process of defining a new strategic framework for the group, one that both protects and drives our core businesses and categories, but also identifies opportunities for accelerated growth. There is a lot of work to be done, but potential is even greater. And with that, I think we're open to taking your questions.

Our first question comes from Shane Watkins of All Weather Capital. Trade and David Jones for the first 10 weeks at minus 12% actually seems quite good, given the Victoria lockdown, but the Elizabeth Street refurb was underway during this period in the prior year. What was the effect of the Elizabeth Street refurb in the prior year?

Thanks for the question, Shane. Yes, I mean, I think you're right. I mean I think the -- we're very encouraged by the level of trading that we're seeing so far this year. Victoria's side, I think we're trading quite healthily and up on prior year across all states in Australia. Specific to Elizabeth Street, very pleased with the performance we're seeing through that store. I think the effects of the disruptions in the base year that we're talking about, we're probably around 3%. But there's a lot going on that store that gives us some encouragement. We're seeing certainly footfall down given the COVID context and the pressure on CBD stores. But we're also seeing phenomenal feedback, remarkable feedback from our customers about the store, the store environment. And although they are frequenting the store less, they're certainly spending more every time they go into the store and our ATVs are up almost 80% on prior year. So very encouraged by what we're seeing with trading so far this year.

Our second question comes from Charles Bulls of Titanium Capital. Food made an EBIT margin of 7.7% in 2020, 8.4% in the second half. Is Food pricing appropriate long term? Are the pricing levels not such that WHL will incentivize more competition over time?

Yes. Thanks, Charles. Look, I think we're deliberately looking to improve our value proposition across the board and specifically, in Food. I mentioned that we're planning a ZAR 750 million investment in price in the food business, and that's more or less 2% of revenues. We are obsessive about market share, and we're going to be leveraging price, product development and a range of other initiatives to ensure that we remain competitive and not lose market share going forward, Charles.

Our next question comes from Peter Cromberge of Mergermarket. Can you outline all of the initiatives that are being undertaken to reduce leverage to 1.5x? Also, when does Woolies hope to achieve the 1.5x net debt-to-EBITDA target?

Yes. Well, I mean, we are doing a lot in this area. I mean I think one of the positives is the level of CapEx investment that we are undertaking going forward is going to be significantly lower, given the fact that we're through that CapEx [ hump ]. Many of you will be aware of the levels of investment we put into our Elizabeth Street store, and that's now clearly come to an end. In addition to that, we do have the big lever of our dividend, which is obviously playing into that as well as several other initiatives we're taking around generating cash, preserving cash. There is a number of initiatives we've announced or shared around taking costs out of the business, which we'll continue with, and then we're also putting a significant focus on working capital, specifically inventory through that process. But Reeza, would you like to add to that?

Yes. Roy, I think there's been a lot of lessons through the COVID crisis, especially around cash generation and preservation. And I think, as a group, we've actually done particularly well in that area. ZAR 1.6 billion net gearing reduction through the period. Net debt-to-equity is actually reduced from 1.3x to 1.1x. So I think a really good performance. Obviously, within Australia, we have the underpin of properties that we will be embarking on in terms of -- it's one of the levers to actually reduce debt. And then in South Africa, we have underpin also of the Foods business, which I think, further -- will strengthen the balance sheet.

We have a question from Funeka Maseko at Renaissance Capital. In your view, are the shifts to online and to conveniently located stores structural and sustainable in South Africa? How well positioned do you believe your business is to take advantage of these shifts?

Yes. Thank you. I'll take that one initially. Thanks, Funeka. Yes, I mean, I think what we have seen through COVID is a significant shift in customer shopping behavior, and that's been evident across multiple generations, not just the younger generation being sort of technologically savvy. We've seen a significant offtake in digital engagement, as I say, across generations. Our view is that much of this is, in fact, going to stick, and we should expect to see this feature of this seismic shift and this online growth continuing and enduring. I mean to, specifically, the point of how ready are we for this and how equipped are we for this. So our teams across the respective businesses are in slightly different places. Country Road Group team are perhaps the furthest along in the group with our overall online proposition and our online business and the driving of that business, where today, the level of online penetration now exceeds -- or is around 30% or exceeds just over 30%. David Jones has benefited, as I said earlier on, from the investment that we've made in our platform. And that continues to grow there, where we're now closing in on the 20% mark as a share of business. In South Africa, the numbers are obviously a lot lower but have grown quite exponentially off a much smaller base, and the team here have embarked on a strategy, which will really be completed through a 3-phased approach. But initially, really focusing on the fundamentals of building an online business and then sort of evolving that to one which really transforms the entire consumer experience around the online business. So quite a lot going on in that space and something that we are effectively pivoting to and you'll see that through the allocation of our capital as well. We are planning a significantly greater level of investment behind digital and specifically in the capabilities for the online space.

We have a question from Sean Holmes of RMB. Can you please elaborate on areas where you see easy wins?

Yes. Well, I mean, I think, I guess, across our businesses, there is easy wins within the functions as well as within the business units. For us, we're starting to see really encouraging momentum in our beauty business, for example, here in South Africa. And our growth in that area and our strategy, which outlines a very determined shift into beauty and taking a greater share of that market. So certainly, that's one area. As far as home is concerned, yes, similarly here in South Africa, we could sort of -- yes, we could say, we've been almost dabbling in that space in a way. But we're certainly very, very sort of excited about what we're seeing in home, particularly through this COVID period, and that's something we're going to be getting after fairly significantly and particularly through our online proposition there. So there is opportunities there. Within FBH and taking a specific look at fashion, there, too, lies several opportunities in certain of the categories that we know we're well known for and that we truly stand for, and the team have taken various initiatives to get after that. And I could certainly expand that into Foods as well.

We have a question from Warren Riley of Bateleur Capital. Could you please confirm that an equity raise is completely off the table at this stage?

Yes. I mean, I think, I guess, there's been a fair amount of speculation around that. And from our perspective, it's just simply not required. So I've mentioned a couple of the things earlier on around what we've done around strengthening the balance sheet, and those initiatives have put us in a good place. We've also sort of traded the business quite well through this process, and we're at a point where we don't see the need for an equity raise, certainly not in the foreseeable future.