Was the $2.2 billion acquisition of upmarket Australian department store chain David Jones by Woolworths, the South African retail giant, a misstep?
Five years after the controversial purchase, David Jones has proven to be the weight dragging parent company Woolworths Holdings Ltd. down to another annual loss.
At the end of August, WHL reported results for the year ended June 30. While group sales increased by 3.9 percent to 78.2 billion South African rands, or about $5.4 billion, adjusted profit before tax fell 3.7 percent to 4.6 billion South African rands, or $305 million.
Due to the recent David Jones writedown — there was a first impairment charge of 712 million Australian dollars, or $527 million, in June 2018 — earnings per share dropped to a loss of 126 Australian cents, or 9 cents. Having cut the valuation of David Jones by another 437.4 million Australian dollars, or $301 million, the Australian department store chain is now worth less than half of what Woolworths paid for it in 2014.
Woolworths withheld Australian dividends this year, basing dividends solely on the performance of its South African business.
WHL Group chief executive officer Ian Moir acknowledged that the results were disappointing. “Trading conditions remained tough in 2019 with little economic growth momentum in South Africa and Australian growth slowing to its weakest level since 2009,” he said.
Moir noted that “our businesses continued to trade in line with, or ahead of, the market, demonstrating our ability to deliver to the changing needs of our customers.”
Sales at Woolworths in South Africa rose significantly in the second half of the year; overall sales for the year were up by 5.8 percent, driven by fashion, beauty and, particularly, food, where Moir said the group experienced “excellent growth once again.”
David Jones, nevertheless, continued to stall WHL’s earnings. “The impairment reflects the economic headwinds and the accelerating structural changes affecting the Australian retail sector as well as the performance of the business, which has fallen short of expectations,” Woolworths said.
In his report, Moir cited additional factors apart from the weakened Australian economy — the apparel sector remains constrained, highly competitive and promotional; the continued reduction in shopping mall footfall as customers shift to online shopping, and, despite record low-interest rates and strong job growth, consumer spending remains depressed by high levels of indebtedness, a cooling housing market, low wage growth and rising non-discretionary costs.
As for David Jones, Moir said, “We experienced peak disruption from the refurbishment of the David Jones’ Elizabeth Street store.” The refurbishment cost 400 million Australian dollars, or $270 million, and the store is expected to be completed by the end of March 2020.
According to WHL audited group reports, total sales at David Jones were down 0.8 percent. Online sales, on the other hand, grew by 46.8 percent, and its contribution to total sales was now 7.7 percent. Operating profit fell to 37 million Australian dollars, or $25.4 million.
Moir has been acting as ceo of David Jones since former ceo David Thomas’ abrupt departure last February. Following the release of the WHL Group’s results, however, the board prevailed upon Moir “to be primarily based in Australia” to oversee the turnaround of David Jones.
In an interview with WWD in December 2014 right after acquiring David Jones, Moir said, “We saw in David Jones, a big department store in Australia, the opportunity to create a very big business with all of the economies of scale, with all of the benefits…and to bring all those entities together to form what will be the biggest department store business in the Southern Hemisphere.”
David Jones, he said at the time, was a good fit for Woolworths, which by then had already owned the Australian lifestyle brand Country Road, as well as Trenery, Witchery and Mimco — now integrated into the Country Road Group.
“It wasn’t just about creating the scale and the ability to compete in the future driving the acquisition. We also saw an opportunity with David Jones. We saw a company we really felt we could turn around, we felt we could fit into our business really easily and well, we could improve the profitability of and we could really improve the customer proposition in that marketplace,” Moir said at the time.
His dreams of Southern Hemisphere domination have clearly been set back, but there are signs of recovery at David Jones. The WHL results report stated that the new floors opened to date since the refurbishment began, which include luxury shoes, Disney kids’ wear, beauty and accessories, and two women’s wear floors, “have all traded well and ahead of expectations.”
Also ongoing is a program of net space reduction across the David Jones store portfolio “to improve store productivity as online sales grow, and to build further brand exclusivity.”
Moir remains optimistic. “Our businesses are well-positioned to see through the significant economic and structural challenges retailers are facing. We are focused on building future-fit, customer-focused businesses with strong portfolios of brands that deliver long-term value,” he said in the report.