Blackouts cost Woolies R15m a month in profits last year

1 Mar 2023

Everyone’s feeling the pain from rolling blackouts – even those juicy Woolies chickens. But if you’re a shareholder, you should be delighted as the retailer has declared an interim dividend almost twice that posted in 2021, from 80.5c per share to 158.5c/share.

On the dark side, Eskom’s powerlessness cost Woolworths almost R90-million in profit over just six months, and blackouts are expected to continue putting a damper on business for the foreseeable future.

The food and clothing retailer released its interim results on Wednesday for the 26 weeks ending 25 December 2022, which revealed its SA food business stretched its reserves as it battled to protect its cold chain. Now, most of its stores have generators.

Woolworths estimates that the financial impact of the power cuts had slashed its southern Africa adjusted operating profit by about R15-million a month (R90-million in total over the half) – most of which was incurred in its fresh food business, causing increased waste and diesel costs in both its supply chain and stores.

It said given the erratic and unpredictable nature of the rolling blackouts, it was focused on developing a “longer-term business solution to sustainably mitigate both upstream and downstream impacts to this challenge”.

This included the impacts on Woolworths suppliers, most of whom had supplied the retailer for decades and were straining under prohibitive costs to manage breakdowns.

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“Whilst we are focused on minimising both the operational and financial impacts of load shedding, our primary objective is to protect the quality and integrity of our superior cold chain, and the trust our customers place in our brand.

“We have made significant past investments in our energy supply capabilities, with 99% of our stores and all our distribution centres already equipped with generator capacity.”

“In SA, an imminent resolution to the debilitating power crisis and stimulus for economic growth appears remote,” it said, adding that the effect of higher inflation and interest rate hikes put pressure on consumers.

Despite pressure on its food business, turnover grew by 7.6%, with sales growth accelerating to 8.6% in the last six weeks of the period, despite blackouts.

Online sales through Woolies Dash increased by 22.7% and now comprise 3.6% of South African sales.

The retail group said its “Fashion Beauty Home” turnaround strategy was gaining traction, with turnover and concession sales growing by 11.2% and 11% respectively. It had also focused on full-price sales and a smaller but more profitable winter clearance sale, which saw gross profit margins increasing to 48%.

Financial services

Woolworths Financial Services, which offers store, credit and insurance products, had seen a year-on-year increase of 17.2%, while annualised impairment rates rose to 5.5%, compared with 4% in the prior period.

Total headline earnings per share, the main profit measure that strips out tax and exceptional items, leapt 75.1% to 294.5c over the period, while earnings per share were up 74.9% to 293.7c. Adjusted headline earnings per share grew by 75.5% to 284.7c during the half year.

Expenses grew by 10%, while adjusted operating profit increased by 25.5% to R979-million.

International

Internationally, Woolworths in Australia and New Zealand was recovering. Country Road Group sales grew by 25.5% and 26.6% in comparable stores, underpinned by strong performances from the Country Road, Politix and Witchery brands.

Turnaround efforts for David Jones, labelled the group’s “problem child”, were starting to pay off as sales increased by almost 30%, with flagship stores performing better than expected.

Woolworths paid a premium for David Jones, spending Aus$2-billion (about R21.4-billion) on the acquisition in 2014. It’s taken a thumping over the purchase.

On 19 December, Woolworths announced it was to sell David Jones to Anchorage Capital Partners. Bloomberg reported that the deal was worth around A$130-million (about R1.5-billion).

The David Jones transaction will make a material difference to the group’s balance sheet by relieving it of R22-billion in liabilities (including R17-billion in liabilities relating to the David Jones store portfolio).

The group ended the half with a healthy balance sheet and a net cash position in Australia of A$351.4-million.

David Jones is now reported as a discontinued operation in the group’s interim results. Settlement is expected by the end of this month.

Toughening environment

In South Africa, the group expects a toughening H2 trading environment as it faces numerous headwinds through higher inflation and interest rates, which are placing pressure on consumer demand and costs.

Last week, Woolworths competitors in SA, Checkers, Pick n Pay and Spar issued a joint statement in response to the Budget, calling on the government to extend the diesel fuel levy refund granted to food manufacturers to retailers.

“Our supermarkets are on the frontline in keeping the lights on, and the shelves and chillers stacked, for customers during load shedding. It is costing us billions of rands in diesel to fuel our emergency generators,” the CEOs wrote.

“We are doing our best to absorb as much as possible of this cost, rather than pass it on to the public at this most difficult time. But we cannot do so indefinitely. And we cannot do it without some cooperation from [the] government.”

The market didn’t love Woolworths shares today though: It lost 3.45% in value over the course of the day. BM/DM

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