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(Photo: David Jones, Woolworths)
Roy Bagattini has launched a triple strategy to turn David Jones’ fortunes around. For starters, shareholders will not be asked to inject more money into Woolworths or David Jones through a capital increase. And David Jones’ properties will be sold and his network of stores will be reduced by 20% to save money on rental costs.
New Woolworths CEO Roy Bagattini has nailed his colors to the mast on the retailer’s ill-fated foray into Australia in 2014 via the purchase of department store mega chain David Jones for R21.5 billion.
Bagattini does not rule out the possibility that Woolworths will cut its losses with David Jones, acknowledging that the South African retailer’s ambition to dominate the world has been a “painful journey from a shareholder perspective.”
“It wouldn’t be correct to say that we won’t cut our losses if we can’t get it right at David Jones … One of the benefits I have here is that I don’t come with a sentimental baggage about David Jones,” Bagattini, who inherited the mess on David Jones when he replaced his predecessor, Ian Moir, on February 17, said Business maverick.
Moir aggressively pushed Woolworths to Australia to create “a leading retailer in the southern hemisphere” and repeatedly told shareholders to be patient for a reversal of David Jones.
A departure from David Jones would see Woolworths join the ranks of other South African retailers who are exiting markets outside of their home country. Shoprite is leaving Nigeria and Kenya because it is underperforming there, Price is leaving Nigeria for similar reasons, and Truworths has cut the value of its UK-based shoe chain, Office, by nearly R5 billion, market watchers to create a dress rehearsal for a possible exit from the country.
But Bagattini, a former Levi Strauss executive, is not giving up on David Jones, because “the goal remains to extract value from the business as long as we consider that it is still worth squeezing the juice.”
However, some shareholders are tired of being pressured and asked to support David Jones, who was supposed to be transformative for Woolworths as he was destined to propel him to become one of the top 10 chain stores. by departments of the world.
The David Jones mess
Woolworths overpaid for David Jones as he reduced his value by approximately R13 billion (he paid R21.5 billion for the business). Shareholder value has also eroded: Woolworths’ share price was trading above R105 when it bought David Jones in 2014, but was R35.20 on Friday, September 18, 2020. During the same period, Woolworths It has gone from being a company worth almost R90 billion on the JSE to R36.9 billion.
Woolworths has cited several factors why David Jones falls short of expectations: poor fashion choices in womenswear, a sluggish Australian economy, a late start to winter, and consumers abandoning department store shopping for online purchases. More recently, Woolworths blamed the Covid-19 crisis, which resulted in trade in its Australian and South African stores becoming limited due to government rules aimed at stopping the spread of the contagious virus.
This contributed to Woolworths posting a 54.5% drop in group profit before tax to R2.2 billion for the year to June 2020. Group level sales (including SA and Australia companies) fell 1.2% to R72.2 billion. The food business continues to be the group’s benchmark, with sales growth of 10.7% and a decrease in sales of the Fashion, Beauty and Home (FBH) division of 10.7%. Meanwhile, David Jones sales fell 6.4%.
A Cape Town analyst said: “Investors will keep asking if it makes sense to keep the food and FBH businesses under the same umbrella. Questions have been raised in the past about whether [separation of the businesses] it can be done… A separation will be very difficult to achieve. FBH always had an advantage over its competitors in that customers walk through FBH (in many of its stores) before reaching the food, which is attracting a good audience.
Arguably the sale of David Jones is not timely as Woolworths is deeply committed to Australia. Woolworths’ Australian corporate debt has soared to about A $ 360 million (R4.3 billion). Woolworths has also used the assets of David Jones ‘sister company in Australia, Country Road Group, as a cross guarantee for David Jones’ debt.
“In my opinion, we are too far away to get rid of David Jones. But let’s not forget that a new CEO will want to dump all the remaining assets that don’t fit the group. Everything is possible, ”said the analyst.
The change
Bagattini has launched a triple strategy to turn David Jones’ fortunes. For starters, shareholders will not be asked to inject more money into Woolworths or David Jones through a capital increase (when a company invites shareholders to buy more shares, usually at a discount, to raise money for its operations. ).
“We don’t see the need for a capital increase. It is not in the foreseeable future, ”he said.
Other parts of the strategy involve cutting David Jones’ store network by 20% to save money on rental costs and raise money for the business by selling his Australian-based properties.
Woolworths has already sold a David Jones property, the Bourke Street Menswear store, for AU $ 121 million, the proceeds of which will reduce the company’s debt. And two other properties are being sold.
When asked how long it would take for David Jones’ shift to produce demonstrable results, Bagattini said, “We should start to see a change in the business in the next 12 to 18 months.” DM / BM
