ARTICLES

Woolies Risk and Gearing

6 August 2018 By PDSNET

Every investment has risk, because without risk there cannot be an inflation-beating return after tax or any real growth. From a fundamental perspective, risk is usually measured in terms of a company�s gearing � how much debt has it got relative to equity? Or in simpler language - how much money have the shareholders got in the business when compared with what outsiders like banks and creditors have in it. A highly indebted company is always more risky � but then it may grow more quickly because of the risk which it took. The problem for any highly indebted company is that if the economy enters a downturn where interest rates are rising, it can easily get caught between a rising interest bill and falling sales. This is exactly what has happened to Woolworths. Everyone in South Africa knows about Woolworths. We value them as a supplier of very high quality food and sometimes we buy clothes or household items from them. For years they have been the retailing benchmark in this country - the supermarket against which all other supermarkets were measured. Their superior quality and customer experience enabled them to command a small but noticeable price premium. And they were blue chip. As an investment, their finances were conservatively run and overwhelmingly sound. And this business philosophy was built and sustained by Ian Moir � CEO of Woolworths from 2010. Everything was going very smoothly until 2014 � and then the Woolies board took the fateful decision to buy a struggling Australian department store chain called Country Road. This cost them AU$2,1bn � which was a stretch for the Woolworths balance sheet but manageable � provided they could turn Country Road around and make it profitable. They took an enormous risk with the idea of catapulting themselves into the international retail arena. At first, investors were inclined to give Ian Moir and his team the benefit of the doubt. After all, Moir had experience and an excellent track record. If anyone could make a success out of Country Road it had to be him � despite the fact that most South African companies that have tried to enter the Australian market over the years have failed. But then the bad news began to trickle through and investors began to lose their nerve. This can clearly be seen in the chart:

Woolworths Holdings (WHL) June 2008 to August 2018 - Chart by ShareFriend Pro

This chart shows the progress of Woolies since April 2008. It shows how effectively and successfully the company was able to deal with the impact of the sub-prime crisis. And then it shows how the company became bogged down in trying to turn around this aging department store in a foreign country. One of the major problems is that department stores are an out-dated retail mechanism. The future of retail must surely be in online shopping. The move is away from shop fronts and towards distribution warehouses. So now Woolies has been forced to acknowledge its mistake by writing off AU$712m of what it paid for Country Road. It is saddled with a huge debt in an environment where sales are falling and interest rates are on the rise � a classic problem of risk and gearing. But then, of course, you have to take a chance � or you will never grow. We recommend that as a private investor you apply a simple trendline to the Woolies chart and wait for an upside breakout � but you may have to wait for quite a while.

DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.

Share this article:

PDSNET ARTICLES

Exponential Growth

The  S&P 500 index is important because all the stock markets around the world tend to follow it. If the S&P is in a bull trend then London, Tokyo and the JSE will also be in a bull trend – and vice versa.

The S&P500 index began 68 years ago on 4 th March 1957 with an initial value of 43,73. It took nearly

The US Jobs Market

International investors who trade on Wall Street are generally negative about any good news from the economy because it tends to make the monetary policy committee (MPC) more hawkish and less likely to reduce interest rates. The opposite is also true. But there comes a point where bad news is so bad that investors begin to fear that the US economy is heading

Jackson Hole

Once a year in late August central bankers and academics congregate in Jackson Hole to discuss the state of the economy and consider the way forward. Traditionally, the Chair of the Federal Reserve Bank (“the Fed”) addresses the meeting and gives direction to its thinking on monetary policy in the US. This year, the comments of Jerome Powell resulted in the

Choppies

Choppies is a supermarket chain which operates in Botswana, Namibia and Zambia. It is listed both on the Johannesburg Stock Exchange (JSE) and on the Botswana Stock Exchange (BSE). Notably, the company has resisted the temptation to re-enter the highly competitive and cut-throat retail market in South Africa, having exited that market in 2020 due to sustained losses. Despite

Gold Resistance

All investments throughout the world can be ranked on a scale from high risk to low risk. As a general rule, in the world of investment, risk and return rise together. In other words, as the risks in an investment increase, so does the return necessary to attract investors.

At the one end of the scale there are very low risk investments

Sibanye takes off

We have been writing about Neal Froneman and Sibanye for years now. Beginning in 2013, Froneman assembled the Sibanye group over a period of 7 years, buying up mining operations both in South Africa and America at bargain prices. Initially he bought precious metals producers, but more recently he has been diversifying into base metals like zinc and lithium which

The 16 Year Bull Trend

Since the Second World War, the stock markets of the world, including the JSE, have always tended to follow the New York Stock Exchange (NYSE) - and the NYSE is best measured by the S&P500 index (S&P) of its 500 largest companies.

For this reason, we believe it is important for private investors to constantly

CA Sales Revisited

Retailing in Africa is difficult with many of our leading retailers having attempted to open stores in countries to the North of us without notable success. These countries are often unstable and volatile politically. Getting adequate stock to branches has proved problematic and expensive.

It is not surprising therefore that a company has been

Bluetel

Bluetel (BLU) is a company involved in pinless top-ups, prepaid electricity, ticketing and universal vouchers. As such it is a company with substantial repeat business from existing customers. This type of business model is attractive to investors because it implies minimal working capital and strong cash flows.

Bluetel’s purchase

The Debtors' Book

A BIT OF HISTORY

Many years ago, in 1982 when I started this business (which became “PDSnet”), I ran advertisements in both the Rand Daily Mail (RDM) and in the Star – which were the two most widely read newspapers in Johannesburg at the time. At that time, we were a very small business and had no credit rating at all. Despite this the RDM immediately