Woolworths Holdings Limited (WHL) Earnings Call Transcript & Summary

Good day. A warm welcome, and thank you to all of you online for joining us today. With me is Roy Bagattini, our group CEO; and Reeza Isaacs, our Group FD. I think with no further ado, Roy, over to you if you'd like to kick off with some opening remarks.

Thanks, Jeanine. Yes, and good day to all of you, and thank you very much for making the time to join us today. We decided, I guess, to set up this opportunity, which is something we haven't typically done as a group before. And that is to have a pre-close call. Really to engage with you on various aspects of the business ahead of us going into our close period. The format that we'll follow, certainly over the next hour or so, will essentially be one-off Q&A. So please feel free to begin posting your questions online as we get into the session as we continue to work through the session. I'm going to kick off with a couple of opening remarks. And then, as I said, we'll move into the Q&A. You would have noticed that we haven't released the sales update and therefore, won't be talking to any specific numbers, but we do want to use the opportunity to really share, as I said, some of the perspectives on the current trading environment and our various businesses in South Africa and Australia in the context of that. We've just got about 4 weeks to go as we sort of round out our financial year. And yes, it has been an unusual and very busy year for us. We did set ourselves an ambitious agenda, and we set out to accomplish a number of things. And overall, we're pleased with the progress we've made. And certainly, where we find ourselves at this point. And obviously, we look forward to sharing the detail of that with you, particularly when we sort of share our upcoming results. But if I can turn to Australia, firstly, it's, yes, certainly, fair to say, I think, that we've seen a faster recovery there than most would have anticipated. Very different macro context to what we see in SA. But certainly life, pretty much back to normal with the exception of international travel. So not a lot of tourism coming in, but also not a lot of Australians traveling out. And that's been quite supportive of the very inward-focused consumption, which is certainly buoyed retail spend, and we've seen our share of benefit from that, too. Overall, we're quite satisfied with the way we're trading there. And in particular, with the sort of persistent momentum we're seeing in the Country Road brand, which has been very encouraging. We're also obviously very encouraged by the outlook for both businesses, albeit, yes, the region is still pretty much prone to snap lockdowns as we're frankly witnessing at the moment with the state of Victoria. But that's something we're going to need to continue to manage our way through. I think in terms of Australia, some of the strategic initiatives, that's worth mentioning. We were very pleased with the successful execution of our capital plan. We've reduced net debt. We strengthened the balance sheet. And that critically has enabled us to split the covenant group with David Jones and the Country Road Group. And as a consequence, unlock value for David Jones, Country Road and WHL as a group as a whole. I did say sort of pretty early in my tenure that we would not see any further funding flowing from SA into Australia, and we've maintained that commitment throughout. The business now -- the businesses there have been set up now with their own funding structures. And I think you sufficiently funded to pursue their relative strategic potential. The focus now has really shifted to the P&L across both those businesses. And certainly, in David Jones, various initiatives are well underway. We've been working on the refresh proposition to the customer. We've been working on how we trade the business. You'll appreciate our margin -- our historical margin performance there has been something of a challenge. We're working on improving GP margin and reducing cost to sell overall. And in fact, we're making good progress literally on all fronts. One of the things I do want to call out specifically is one of the key priorities we've had there was stemming the losses from our David Jones Foods business. And pleased to say that we have recently closed our smaller format food stores, Bourke Street, Capital Grand, Melbourne, which were all loss-making, and we're well into the process of exiting from the trial that was initiated with BP. And the results here, I think, is that we're going to convert the David Jones, just sort of food losses, which you may recall, we're running at around $50 million a year from an EBITDA perspective to a breakeven position certainly within our next financial year. Just as we said, we would do. So that's a couple of opening comments on Australia. Happy to come back to any of those points in our Q&A. I think shifting over to South Africa. We've -- from a food perspective, I mean, we're very satisfied with the way we're trading in foods at the moment. The business remains quite resilient. We've made some successful investments into price. Those initiatives are resonating well with customers and certainly paying off. In terms of online, we've now expanded our online capabilities and are now ready to roll out the next phase of Woolies Dash. We've also launched our W seller prototype early days, but certainly resonating well, not so great feedback on that. And certainly, the opportunity is to continue to grow share through our accessibility strategic theme, I think, is very, very exciting. Looking to the end of the current financial year. I mean, you'd recall that we're up against a pretty tough set of comps given the impact of COVID, which positively impacted sales, GP and EBIT margin in the second half of last year and particularly in this final quarter. But really, within this context, the convenience formats across food continues to outperform, particularly our larger format stores. But in terms of category, we're seeing some recovery in prepared foods, which is good news and continued growth in grocery and frozen. On the FBH side, as you're keenly aware, I mean, this business has been beset with all sorts of challenges, both in terms of strategy and execution. And we continue to work on those. We have done a full review of the business and a reset of our strategies and execution is now underway. Appreciating the nature of this business. It will take a moment for us to see what I would like to call sustainable progress and not just sort of ad hoc process -- progress, but sustainable progress that we are in fact targeting. So more to come there. But top line certainly remains under pressure, in part due to the fact that we are exiting private -- many of our private label brands and consolidating under the Woolworths brands. We're reducing our formalwear offering. You'll recall, we talk about us being significantly over-indexed relative to the market, and we're certainly cutting back on a fair amount of unproductive space. Effectively, you'll see a big theme play through both in terms of what the customer sees and what we also see in terms of the financial performance, and that is this concept of editing to amplify. Our focus is really on driving quality over quantity, sort of doing more with less and having greater conviction behind the things that we decide to stand for. I've said this before, but we'd be, in fact, a little happier to see a slightly smaller business from a sales perspective, but one that is significantly more profitable. So that is the focus is really on the underlying financial health of that business. So we don't expect to see any sort of significant market share gains over the short term, particularly in the aggregate. But what we do expect to see are gains in the categories that we've determined are important to us. Clearly, in our minds, this remains -- FBH remains the single biggest opportunity for us to unlock value for the group. So I'll pause there for now in terms of opening remarks and really just throw it open to questions. And I think we have a process around that. I think a number of questions already come through. I can see, Jeanine, if you wouldn't mind starting up and telling us what the first question is.

Of course, Roy. Thank you. First question. Roy, you've been in the organization for over a year now. Looking back at the progress you've made, what are you most pleased with -- pleased at, any areas where you would like to have done more.

Okay. Yes, I mean, it's -- it's a bit of a mini performance review in a way. But no, seriously, I think you'll recall, obviously, I came on Board pretty much at the same time as COVID became a reality in all of our lives. And I guess when I reflect on a number of the discussions we were having at that time, certainly around March period last year. We had some very significant challenges that were facing us and that we would need to sort of really deal with, particularly as they relate to the balance sheet and the strength of our balance sheet. And I'm very pleased, by the way, I think our team worked together in formulating an appropriate strategy to navigate through a number of these challenges that we had to deal with. And certainly, when we look back over the last year and we look at where we stand today, the business, I think, is in a significantly more healthier financial position than what we had anticipated would be going into COVID. So very pleased around the way we had, in particular, executed that capital plan in Australia, certainly ahead of expectation. In terms of proceeds as well as in terms of timing, which is really important. I think we are trying to convey, certainly to our investors that if we say we're going to do something, we are going to get it done. We want to be seen as pretty reliable on that front. In addition to that, I mean, I do think the work we've done on the FBH strategy, whilst, I mean, we get to see the benefits that will emerge from that. But I'm very confident that through the restrategizing of aspects of that business. We have clear direction, and I'm looking forward to seeing that sort of play through for us. So setting that up, I think, for success. The continued work we do on foods and keeping our eye on that ball. It's such an important part of our business and the continued progress our Foods team makes on a number of different fronts, I think are really important, too. And I think just perhaps one final point because I'm sure I can wax lyrical here for a little while. But I certainly -- I think the shift that we're making into digital and data as an organization is going to be transformational for us. The way we use data, the analytics we apply can be very transformational for us as a business. And we've made significant strides in ensuring that. I think also that the online piece, you'll recall, right at the outset of COVID, I've acknowledged that we were caught short. I think we've still got some way to go, but we certainly have much more compelling sort of service propositions on the table, three formats online, which are all resonating with customers. So quite a bit, I think, to reflect back on, Jeanine, but I think in terms of some of the things I would have liked to have done more of, I mean, I'd only say that I'm certainly not the sort of CEO that likes to sit behind a computer screen. And I really miss the opportunity to engage directly with the organization. So there have been a number of windows over the of the last recent months and we've got out into stores and that's really where it all happens for me and connecting with people on a face-to-face basis, connecting with our customers, focus groups, et cetera, et cetera, and that's the real world. And so I'd like to have done more on that front, but we expect to do much more of that going forward. Thanks.

Please could you provide an update on the Woolies Dash app implementation. How many stores are on the app now? Is it yet out of cloud base? These indicate what the issues were that needed to be fixed? And have they been? And what is the target would still roll out in the new year?

Yes. Great question. Thank you. Yes. I mean, you all know that we came to market perhaps a little later than some of our competitors with regards to an on-demand sort of solution for our online customers. Yes, but a lot of that was driven by our sort of, I guess, constraint around quality. We do hold ourselves to a very high standard from a quality perspective, and we needed to find an appropriate cold chain solution that could be leveraged in an on-demand sort of environment. We've worked on that. We've got something that we feel is very effective. And we did go into a test phase and have been in a bit of a test phase, but continuously sort of evolving and improving the overall proposition over the last couple of months. We're at 18 stores today, and we're looking at sort of expanding that to around 50 stores during the balance of this particular year. As we continue to sort of almost affect the offering. There are several learnings that came out of that. I mean, clearly, one of the things one does need to do if you really want to move faster in this online space is partner. And selecting the right partners and working with those partners and ensuring they appreciate what's important to you and how you would like to run the business has been part of the learning process. And I think we've got to a point now where we're in a pretty good place with all of the various partners, be they, the service providers, the pickers, the service delivery people, the technology solutions that we're working with, et cetera. So we do feel we're at a point where we're able to scale up Dash on -- now on a go-forward basis. And we'll -- yes, it is an important sort of solution for customers. There is a demand for this on-demand app, and I think there's sort of nonnegotiable to be in the game. A sort of economic and financial challenges around the overall proposition, which we can certainly elaborate on. But I think we've got something that's going to be compelling. And the good thing is that we can integrate this on-demand sort of app together with our curbside or click and collect proposition and our conventional online sort of ordering process into one app, which is what we're work looking on currently. And I think we're the only retailer in this market that has that on offer.

Thanks, Roy. Can you give us an indication into how the [ more casual ] winter clothing ranges have been received? What our sell-off rates like versus expectation?

Okay. I'll take that one, Jeanine. Yes, we -- as we indicated, a substantial -- we're over-indexing in formalwear in both men's and women's. And we have undertaken under [ Marny's ] leadership a shifting to -- into more casual ranges as well as sort of as leisure. However, at this point in time, it's still quite a small proportion of the overall offer and it's selling along expectations. And some of the lines, obviously, doing particularly well. I think the new men's range is doing well. But -- and that men's fleece, et cetera, doing exceptionally well, but still a very small proportion of the business. And obviously, you will see that shift pick up in the new season and in spring summer.

Reeza, thank you. One of the initiatives in FBH was editing to amplify, if this is a journey, what percentage of the way through that journey are you?

Yes. Yes. Thank you. I mean, I guess those things can be described as a bit of a journey. But we're moving fairly aggressively. It's probably difficult to put a specific number on. But I think we're at least halfway down that particular track. You will start to see from a customer perspective, when you walk into a Woolies store, certainly fewer brand names, brand labels. And you also see how we're sort of starting to integrate into the Woolworths brand and how we're bringing that brand to life in a way that we haven't done for some time. So yes, I think we're making significant steps in that process. But one element of editing to amplify is the consolidation of the over-proliferated sort of propositions we had out there. There's also an element around the number of product categories that we're focusing on. We're not trying to be everything to everyone. I think historically, we always I think refer to ourselves as a bit of a broad church when it came to trying to meet consumer demand. And that's a very tough strategy, and I don't think one can be everything to everyone. And we have chosen the things that we think are most important to us that resonate with who we are as an apparel player in the apparel space in South Africa. And there's only a handful of key categories that we're absolutely needing to sort of really focus on to drive the performance that I think we need to get to. Edit to amplify, it talks about our organization and the structure. It also talks to our simplification in terms of ways of working and the de-bureaucratizing of our business where we've had lots of different sort of processes, sign offs, et cetera, et cetera. A lot of stuff that had really got in the way of being agile and responsive in play. So it is a big theme across the FBH sort of strategy and one that I think is, as I say, we're making some good progress on. And we should start seeing the benefits of that much more evident as we play out the back half of this year. And certainly, from a financial perspective as we go into next year.

Roy, thank you. It's a question for Reeza. There's been a significant improvement over the last 2 results in your working capital management. How sustainable is that? And how are you feeling about the health and shape of your inventory position in particular.

We've been very pleased with the way that we've tackled working capital management. Obviously, lots of lessons learned through COVID, in terms of cash generation, in terms of looking at terms of trade. Some of those trade are actually now normalized. We've pushed that up during COVID, in terms of stock turn, in terms of weeks cover, all of those metrics are showing improvement and continue to show improvement. I'm very happy with our inventory position. Some timing differences, based on effects on supply and supply issues, but generally in good shape. And inventory at year-end in our apparel businesses across the board should, in fact, be lower than last year. And remember, last year, we had a significant emphasis on clearing of stock and just generating cash. And this is due to how we're trading the business, reducing intake more in line with actual requirements and also some space reduction. On the food side, we will see an increase in inventory, but working capital management in the food business is really not an issue, highly highly cash-generative business, and, yes. Thanks, Jeanine.

Reeza, thank you. Checkers fresh ex stores' performance has been strong and Shoprite is focused on growing this format. What is Woolies' competitive advantage that will help retain customer loyalty.

Yes. I mean, I think we've probably -- I mean, we have spoken about this before, but I think it is absolutely worth sort of reminding folks about. I mean, I think the Woolies food business, we certainly see as this premium food proposition as sort of synonymous with these words. And the team would sort of contest every single inch of this space. And there are a couple of reasons why I think they can do so successfully and for some time to come. I mean you're aware, obviously, we have an immense amount of trust in the Woolies food brand, and that's been built up over many, many years through various things that the team have been executing. I mean for one, our focus on quality throughout. I mean, we do hold ourselves to a much higher quality standard. And most of our peers do in the industry. And we're able to sustain that because we have capabilities such as centralized distribution, [ cold ] chain capabilities. We have immense amount of investment going into food science, food technology, agronomists, et cetera, et cetera. That really look at all aspects of how the product is made and how we bring it to market. Obviously, this is based on great long-term relationships and partnerships with suppliers that have been invested in over many, many years. We have, I think, a very formidable new product development capability. We drive innovation perpetually. I mean, we have a series of targets around levels of innovation across different categories. And you will find somewhere between 10% to 15% of new -- of products that are new or innovated in our stores at any point in time that might not have been there in previous season. These are capabilities, which we often refer to as sort of back-end-type capabilities, but they're certainly not the ones that the customers sees on a day in and day out basis, but they really are not that easy to replicate. And so from that perspective, I think we do have a fairly entrenched sort of series of competitive advantages in this space. Beyond that, though, I think when we look at the opportunities for growth, we're also excited about that. I mean the capabilities enable us to look at growth, whether it's through greater opportunity to access the brand and bring new consumers into the brand through our pricing initiatives, our range extensions through our format opportunities. We're very confident that there's significant headroom for us in this business. And we have -- we do have an amazing skilled and experienced team that sits behind all of this. So I think there is -- those that want to play in the space and then those that can do it on a sustainable basis and put ourselves into the latter category.

Thank you. Reeza, a question for you. Please, could you comment on any progress made regarding cost cut across the group?

Yes. We -- cost cutting, again, a significant emphasis across the group. We obviously saw a reduction in our cost base in the previous financial year through COVID, lots of costs that we did not incur like travel and some [indiscernible] costs, et cetera, et cetera. And again, start with working capital, lots of lessons learned through cost-cutting that we're hoping to sustain. We've set cost targets for each of the businesses, all of South Africa, the -- between the food and the clothing business, FBH, David Jones and Country Road, and for this financial year, all businesses will, in effect, meet and/or exceed their cost targets for the FY '21 financial year. So I'm very pleased with that. The one thing I do have to remind you of is that in the case of David Jones and Country Road, we had significant relief in our cost base in the form of job keeper and rental abatements in the second half of the previous financial year and in the second half of -- and in the first half, sorry, of FY '21 so in last year, the total one-off relief was $59 million across David Jones and Country Road. And in the first half of this financial year, it was about $79 million. So significant impact on the cost base.

Reeza, thank you. Roy, if I heard you correctly, you have ended the BP JV in foods in Australia and closed the smaller stores. Does this signal the end of food journey in Australia.

Yes. I mean, it's a good question. I think, again, being very candid, I think our strategy for Foods with David Jones in Australia was unfortunately fairly flawed right from the outset. And sort of cuts in [ pays ] from SA was never really going to be the solution there. And I think we went about doing things in a way which we've seen the sort of consequences of here. I think our commitment here was really to ensure that what we do in Foods is not detracting from the profitability of the business, but ultimately becomes a contributor to the profitability of the business. So I don't think we're going to be sort of out of foods in every sense of the word, but we are going to be doing it very differently, and we're only going to be playing the game in a way that allows us to -- for food to be accretive going forward. It's likely to be more on a concession basis. And we, from a David Jones perspective, will probably be more in the longer life type categories. And so it's not -- I wouldn't say it's an end to DJ's food, but certainly a fundamental shift in what the ultimate proposition would look like. Thanks, Jeanine.

Thanks, Roy. We've got a few questions around the sort of margin outlook for FBH. Do you have a minimum margin target in mind for FBH? At what margin would this be successful turnaround?

Yes. I mean, I think you said we would probably share some of the sort of outlook from that perspective at our year-end results, and we certainly still intend to do that. I can certainly tell you that they're probably 3 sort of key sort of measures or metrics that Marny and his leadership team are challenging themselves to sort of really dramatically enhance. And they really relate to the percentage of the product that goes out our stores at full price. So the -- we're driving much more full price sales as a theme, which obviously has the commensurate sort of financial impacts. The second one is really around the percentage of markdown in the system. You'll remember we've spoken historically about how that has ramped up quite dramatically over the last several years. So markdowns is a big focus. And then finally, we're really -- one of the other metrics, there are several others, but the other -- the third key metric is really around our trading densities and looking fundamentally at not only sales per square meter, but really margin per square meter. So those are the 3 big measures. And often, I do get the question around how will we start to sort of see when the turnaround strategy is beginning to resonate. We are looking for progress along those 3 dimensions as one element of the turnaround getting traction.

Roy, thank you. What is the impact of high freight costs on your margins? Is there a risk to receiving of some arrangers in time given global supply bottlenecks? Reeza?

Yes. We -- look, the global freight demand is high at the moment. As we -- most companies as -- countries have come out of COVID. And the lead times are unreliable. So we're doing our best to manage inbound stock delays. We have some direct contracts in Australia. We've pulled forward some July and August ranges to mitigate some shipping delays in Country Road. And given the COVID crisis in India, Indian suppliers have been requested to ship the readymade product. Although India is only is about 6% of our total supply base. So in South Africa, we are seeing some pressure on input costs, but -- and we are monitoring this. And hopefully, with the stronger rand, there will be some mitigation of this cost of actually that we'll see coming through in 6 months' time in terms of it.

Is the South African business sufficiently ring-fenced from the Australian business? And if so, how has this been done?

Yes. I mean, I'll start, Reeza, if you want to add any, I mean, please do. I mean, I mean, clearly, the businesses are entirely ring-fenced from both a banking perspective, covenant group perspective and also from a landlord perspective. I know that there's always been -- there's often been an interest in do the landlords have any further recourse, et cetera. And they don't. I mean, they have -- they are totally ring-fenced relative to their specific business units. Reeza?

Yes. The only point I want to make in addition to that [indiscernible] is the $75 million second lien loan. That has shifted from David Jones to Country Road. We have a facility in place for Country Road, [ no facilities ] for David Jones. But again, just to point out, we're not using that facility, Country Road is not using that facility, and we don't foresee the subsidiaries in Australia leaning on that facility in any way.