Investment guide: Woolworths

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Recent reports highlighted the financial issues that appear to be plaguing Woolworths. This is compounded by a growing number of retailers vying for the declining spending power of consumers.

However, it can be difficult to judge the performance of a company. Paul Chakaduka, senior trader at GT Private Broking noted that stock performance is relative. Woolworths Holding Limited (WHL) is down 18% over last year, however, the stock is up 4.9% year to date.

Chakaduka further stated: “The stock performed dismally in 2016, however, the stock has started the year on a sound footing. WHL had a phenomenal 2013-2014 with strong earnings, however, earnings began to taper in 2015 which saw the share price coming under pressure in 2015 and 2016.”

Stefan du Toit, a stockbroker at PSG Wealth Durbanville, stated that market sentiment towards retailers was negative during 2016, with the General Retailers Index flat over a one year period. Woolworths was not the only retailer to fall under severe pressure, with updates from most retailers indicating constrained consumer spending, as well as rising input costs and flat like-for-like sales growth. “Added to this was a sluggish SA economy which grew by only a mediocre 0.2% q/q in Q3 of 2016, with rising interest rates putting further pressure on an already constrained consumer.”

According to du Toit, over the past five years, WHL has performed favourably on the JSE when compared to the FTSE/JSE All Share Index. “The Woolworths share price gave investors a total return, including dividends, of 105% (annualised 21%). This compares favourably to the total return of the FTSE/JSE All Share of 83% over the same period.”

Is Woolworths a good investment?

This can be a difficult question to answer, as there are a number of factors to take into consideration. Chakaduka says: “At its current market price WHL provides a good investment case for a long-term investor. The business has faced a several headwinds in the last two years and has been acquiring businesses across the globe to diversify its exposure and to grow its income streams. Not all acquisitions have been earnings accretive for the business, however, we expect to see stronger synergies and growth going forward.”

Due to its relatively unique business structure, WHL can be difficult to compare to other retailers on the market, according to Chakaduka. WHL investors have exposure various industries, including food retail, clothing, homeware and financial services.

Du Toit noted that other retail groups listed on the JSE include Shoprite, Pick n Pay and Spar. “Of the retail groups Shoprite has the largest market capitalisation with R99 billion, followed by Woolworths on R76 billion, Spar on R38 billion and Pick n Pay with R33 billion.”

He added: “From an underlying earnings perspective, Woolworths is the best price trading at a PE (price per earning) of 15.8x. Shoprite, Spar and Pick n Pay have historic PE ratios of 19.2x, 19.5x and 27.8x respectively.”

What to consider before investing

When looking to invest in Woolworths, du Toit stated: “Woolworths is one of the biggest retailers in the Southern Hemisphere with a strong footprint in South Africa and Australasia. The company provides significant exposure to the Australian economy with approximately 40% of operating profits generated abroad. The company furthers provides a good product spread, which includes Woolworths Clothing, Woolworths Food, David Jones and Country Road. Twenty-five percent of operating profit is attributable to the foods division, providing investors with decent defensive characteristics. The company further targets upper middle class customers where spending habits tend to be less cyclical.”

Before making an investment, there are a number of factors to consider. Chakaduka stressed that it is important to look at growth in revenue, businesses profit margins, gearing, cash flow, stock turnover and ultimately dividends.