I am pleased to be reporting another outstanding year for Woolworths, being the third successive year of real growth.  Most sectors of our portfolio of profit generators came together to deliver these results.

Woolworths now trades in three continents: Africa, Middle East and Australasia and in three primary categories:

Clothing and Home products of high quality and taste, Foods that are delicious, safe to eat and conveniently available to an increasing number of customers, and a tight group of Woolworths Financial Services products providing additional benefits to our customers.

Large parts of all three of these areas are developing elements of an annuity flow which is lowering our overall risk profile.  In South Africa, Australasia and indeed in the Middle East, consumer behaviour in the first half was less constrained than in the second half but continuing good cost control and close attention to margins helped us "deliver the goods".

We are deeply fortunate that within both Woolworths and Country Road, we have enthusiastic teams of passionate, committed retailers.  Most are employed directly by us but an increasing number are employed by our growing band of franchisees who carry our brands into far off places with great pride and excellent execution.  It is thanks to these people and their efforts that we were able to deliver through this fluctuating environment.

We are further fortunate that our suppliers, based predominantly in South Africa and Australia, now spreading to the East through Country Road in particular, have such a deep understanding of the ethos of our two brands.  It is they who make the goods that build the relationships with our customers.  We have worked with many of them for decades and look forward to continuing to do the same for many years to come.

the year in review highlights

Our revenue across the group was up by 14%, which delivered a group operating profit growth of 30% and this together with additional share buy-backs and effective lower tax rate resulted in headline earnings per share growth of just over 40% on top of the previous year’s 43% growth.  This leaves us with a three-year annual compound growth of 37% and a return on equity now at 24%, close to our target of 25%.

During the same period our weighted average cost of capital (WACC) has come down from 17% to 13%.  Our return on equity is therefore well above this.

trading evironment

In South Africa, during the first half, we continued to benefit from the buoyant consumer environment, which flowed out of three successive years of tax reductions and the growing confidence that most South Africans feel about our new young country.

In the second half however, the combination of the high inflation resulting from the significantly depreciated currency and the continuing high interest rate environment, started to dampen the consumer spend.  Further, the late winter, traditionally such a strong period for Woolies, took the edge off fourth quarter sales.

Food inflation, which had peaked during the December period, started to decline by between 1% and 1,5% each month, bringing down Rand sales accordingly.

In Australia, the clothing retail climate too toughened in the second half, despite an ongoing strong economy.  We experienced very aggressive competitor behaviour.  Our own brand being one of the more dominant brands sold by the big departmental stores was heavily discounted in their drive to take market share from each other.

woolworths

Sales were up 15%, or 17% on a 52-week basis, and our operating profit improved by 31%.  Our strategy is to continue to penetrate the markets in which we operate by encouraging more of our Foods customers to buy clothing and more of our Clothing customers to buy food.  The latter is driven by our real estate programme and the introduction of the selected ranges of branded goods, the former by the general upgrade of our quality standards together with targeted niche brands, such as our W Collection ranges.

We feel there is good scope to continue expanding our chain.  In South Africa particularly in Foods, and throughout Africa and the Middle East in Clothing and Home.  We are planning to add more than 150 stores over the next four years.

Whilst each of our divisions will report separately on their progress and plans, I would like to touch on a few of the highlights of the year:

clothing and home
We have continued with our strategy of upgrading our standards of fabric and taste across the board and this, in turn, continues to attract good customer support.  Our brand is built on quality, and as intolerant as our customers are when we fail to provide quality at very good prices, so very supportive are they when we deliver that formula.  Accordingly, our share of market in womenswear and menswear and our footwear improved consistently throughout the year.

In childrenswear and homeware, we did not meet our customers’ expectations and lost share of market.  In both of these, we are now clearer regarding our strategy and, through focusing on good goods at great prices, believe we are capable of positive growth in the future.

Our W Collection and Perfect ranges are attracting more of the upper middle income customer who tends to shop our Foods business and we will be building these areas strongly into the future.

Our ranges of basic or replenishment merchandise now comprise almost 40% of revenue and are producing both good growth and a solid annuity flow of sales.

Approximately 90% of our clothing is sourced in South Africa.  We believe that despite the strong Rand, this can still give us a real advantage on quality, lead-time efficiency and stock turn.  We will be working closely with these suppliers to ensure they remain competitive in the current Rand environment.

foods
On the Foods side, we had another good year and reached a market share of 7%.  Customers are continuing to respond well to our strategy to be the home of healthy eating where good food is conveniently available in an exciting, interesting and fun shopping experience.  Again, quality is our differentiator and our dedicated team of technologists, product developers and suppliers constantly strive to widen this differentiation.

As our efficiencies grow, so we are able to edge constantly into a more competitive position.  Customer research is showing that our perceived price gap, whilst still higher than actuality, is narrowing.  This has been helped by the selected introduction of major national brands which also enables our customer to treat us more as a main shop.

The micro store roll out continues to meet with warm response from customers and will carry on for the foreseeable future.

financial services
Woolworths Financial Services is now maturing into a major part of our business formula.  We have over a million store card customers, a healthy loan book and we are in the early stages of rolling out our Visa card with Woolies loyalty points attached.  Our total book now stands at approximately R2,2bn.

Our team has developed good skills in net bad debt management and recoveries and this indeed now runs at less than 3%.  We will continue to drive the expansion of these books and in the case of the loan book and the Visa card, we will now gear them more in line with accepted financial structuring practice.

franchise
Our Franchise business at retail level reached a billion rand for the first time.  We now have some 53 franchise stores through the rural towns of South Africa selling our clothing.  A number of these will soon be introducing various limited forms of a food offer, which will add feet to those stores and consequently benefit their clothing sales.

We continue to expand in Africa - now at 47 stores - where our clothing ranges are well received and deliver a shopping experience vastly different from the local competitors.  We opened in Saudi Arabia which has had a difficult start.  Despite the general uncertainty in the Middle East, we are again showing signs of real growth in the United Arab Emirates.

This export business, a microcosm of much of the South African clothing industry is not helped by the strength of our currency.  In the long term though, we believe we can offer good value in these markets and have much potential for growth.

improved operational efficiency
Woolworths has many legacy IT systems, which result in core parts of our business being cumbersome to operate.  We have committed to, and are installing a RETEK stock management system, which should start to show real benefit from 2005 onwards.  In the meantime, we are developing a robustness in cost control that is the hallmark of any well-run retail business.

people
Woolies people are special.  As a consequence, we were unhappy with the "casual" relationship we had with the bulk of our staff.  We took the decision during this year to convert more than 6 000 employees to permanent employment status and are delighted with the response that we have had from this energetic group of retailers.

We have implemented a performance-based incentive scheme for every single member of staff and are feeling the benefits of this through on-going productivity improvements.

country road

In Country Road, we have continued to take the bold steps needed to move this business from a great brand but troubled business into a customer proposition that has a growing and profitable future.

During the year, we introduced RETEK, which is beginning to show benefits in stock and margin management, and took the bold decision to exit from one of the two wholesale customers.  We have beefed up the design teams and set in place a more aggressive retail store rollout programme.  This will give this business the capability of controlling its brand values and put more beautiful goods in the right quantities and prices on our counters with better discipline and more excitement.  Simplifying our wholesale model too has enabled us to cut lead times materially.

The forthcoming year will be a testing one for Country Road but we are beginning to feel that the actions taken over the last four years will begin to show positive results towards the end of this financial year.

sustainability

Merging the thinking flowing out of the King Reports and our own deeply held philosophies around the environment in which we trade, has enabled us to be more focused in addressing the broader sustainability elements of our business world.

We have given, and continue to give, our surplus food and clothing, on a daily basis, to people in need.  We our proud to have adopted the most wonderful project – Eduplant.  This encourages pupils and schools to grow fresh vegetables and teaches them about their importance in our diet.  We look forward to being as supportive as we can to Eduplant over many years.

We are proud to be sponsors of the MySchool Programme which, together with other corporate contributors, is making a meaningful contribution
towards schools throughout South Africa.

On the manufacturing front, we now have signed and audited codes of business practice around environmental and employment practices with every one of our manufacturers in South Africa and beyond.  We are actively encouraging our farmers to follow EUREPGAP (low impact farming methods) and have a growing programme of organic and free-range suppliers.

Our textile manufacturers are at the leading edge of waste reduction and pollution management and we work with them constantly to improve this.

future

Going forward, we will keep our two businesses focused on their strategies, tight on cost but most of all, producing more beautiful goods.

In both companies, we see the first half being tough, particularly in South Africa.  If interest rates here continue to come down, there should be an easing in the second half.  Both economies are growing economies and our opportunities for Woolworths in Africa and the Middle East remain high.

appreciation

I would like to make again special mention of all those thousands of people in our stores, our franchisees and our suppliers, and around the world who make Woolies and Country Road such wonderful brands.  Without them, the spirit of those brands would be very different.  We thank every one of them for their ongoing efforts in buying and selling our merchandise, and in being such a wonderful link between our businesses and our customers.

 

Simon Susman
Chief executive officer