Woolworths Shows Resilience in Food, Faces Headwinds in Fashion

Woolworths' latest trading update highlights the complex nature of their operations across markets. In South Africa, the business environment shows signs of improvement with moderating inflation, easing interest rates, and reduced power outages, though discretionary spending remains under pressure. In contrast, the Australian market continues to face significant headwinds from persistent high interest rates and elevated living costs, leading to increasingly price-sensitive consumer behavior.

The company's Food Business continues to stand out as a particular strength, delivering market-leading growth of 11.4%, demonstrating an impressive digital transformation with online sales growing 37.2%. The Woolies Dash service has been notably successful, achieving 49.2% growth and contributing to the overall digital strategy that now sees online food sales representing 6.4% of total food sales. The food segment's success appears driven by strong brand trust, effective execution, and relatively controlled price inflation at 6%.

However, the apparel divisions face considerable challenges across both regions. The Fashion, Beauty and Home segment showed modest growth of 2.5%, while Country Road Group experienced a 6.2% decline in sales. These challenges are compounded by supply chain disruptions and ongoing transformation efforts in distribution centers. The company is undertaking significant structural changes, particularly in CRG, which is undergoing major restructuring following its separation from David Jones, resulting in a higher cost base and operational challenges.

Financial results present a mixed picture. The successful sale of the Melbourne property for A$223.5M and projected EPS growth of 18-23% represent positive developments, along with strong performance in the Beauty segment (17.3% growth) and improved financial services metrics. However, the expected decline in Headlines EPS (-22% to -27%) and negative operational leverage indicate underlying challenges that need addressing.

Strategically, Woolworths appears to be pursuing a multi-faceted approach, emphasizing digital transformation while rationalizing physical retail space. The company is clearly focusing on its core strengths in food and beauty while working to restructure underperforming segments. Looking ahead, key priorities include addressing operational leverage issues, managing continued pressure on apparel segments, further expanding digital capabilities, and successfully completing the CRG restructuring before the end of FY2025. The company's ability to execute these strategic initiatives while maintaining momentum in its successful segments will be crucial for future performance.

Broker ratings and price target

A consensus of broker ratings as per a Thomsons Reuters poll of analysts (28 January 2025) has a hold rating on the stock, with a mean of estimates arriving at a long term price target of 6886c per share.