chairman’s letter
Dear Shareholder
Whilst consumer confidence in South Africa during the period remained strong with food sales reflecting this confidence, we did see a slowing of sales growth in clothing in the latter half of the year with the rand weakening slightly and interest rates rising. During the period the retail sector has seen good overall growth.
our achievements
Woolworths has again achieved a solid performance with headline earnings per share up 17.4% to 105 cents per share, up 22.9% prior to the non-comparable STC payment.
Return on equity grew to 34.8%, from 31.2% in the previous year.
The food business had an excellent performance, growing turnover by 22.5% and increasing market share to 8.5%. Our clothing business reported good volume growth reflecting the early signs of a turnaround in this business. We still expect to do better as we enter the third year of our plan to turn the clothing business.
Woolworths financial services showed good growth of over 22% across all our books – store card, credit card and personal loans – and customer numbers grew at a similar rate. The net bad debt experience on the combined books increased in the period from 2.4% to 2.9% of advances. Return on equity for financial services improved to 11.7%.
The franchise division continues to perform well with the entrepreneurial spirit of the local franchisees clearly evident in the good growth in wholesale sales.
Country Road reported an 8.2% uplift in retail sales, a good result in a competitive Australian market.
challenges
Woolworths reputation for great quality and value remains intact across our business and the focus on innovation, both in food and clothing, is delivering a high level of newness to our customers.
We continue to address the challenges facing our clothing business and remain confident that the greater focus on design and technology, as well as an improved sourcing strategy, will deliver higher returns in this segment of our business.
We are concerned that the implementation of quotas on goods from China will impact our sourcing strategy and negatively affect our earnings.
Bad debt in our financial services business rose during the year under review. With inflation beginning to rise, and related interest rate increases, we expect consumers to start to feel the effects of this tightening credit environment and we need to manage our books accordingly with robust collection processes and ongoing management of credit-granting strategies.
The strategies for Country Road have been implemented and now need entrenching to consolidate the upward trend in turnover and start to deliver improved profits.
focus for 2007
We are starting to see a slow down in consumer spending which will affect the retail sector. While we expect this to have some effect on our like-for-like growth, we remain committed to delivering good growth across the business and our store roll-out programme will help to counter some of the expected slow down.
In meeting the needs of the changing consumer profile in South Africa, our store development programme includes stores convenient to the newly emerged consumers. We are planning to open two clothing, home and food stores in Soweto this year as well as putting new stores into other key emerging communities, which will meet the needs of an increasing number of black customers for a local Woolworths.
Operationally, we should see the final implementation of our systems renewal and start to see the benefits in the business. In March 2007, we should take occupation of the new distribution centre in Midrand, Gauteng – significantly improving our logistics capacity and delivering real efficiencies in our supply chain.
To assist us to attract and retain top talent, we intend to revise the terms of the executive incentive share scheme. It is our intention to convene a general meeting on 15 November 2006 immediately following the annual general meeting to obtain shareholder approval for the proposed amendments.
transformation
We are committed to transforming Woolworths at all levels and have taken a broad based approach to empowerment, covering all aspects of the Department of Trade and Industry’s draft scorecard. In some areas, such as corporate social investment we are already able to attract a high score due to our significant food and clothing donations as well as our community involvement initiatives.
We are finalising our plans for a broad based share scheme for employees, the majority of whom are black. This scheme will be presented to shareholders for approval at a general meeting to be held in this financial year.
In other areas, such as employment equity, we still need to improve our performance. Employment equity remains embedded in the key performance indicators across the business.
governance
Transformation is part of the broader Woolworths sustainability strategy. The benchmarking we are currently doing in transformation has been completed across the rest of our key sustainability indicators for the business and we have a very clear sense of both the key challenges and our targets for improving our sustainable business practices in every aspect of our business strategy. These are embedded in our own Woolworths Sustainability Index which provides a long-term framework for the direction and management of sustainability across the business.
This entrenched commitment to sustainability is reflected in our positioning as the number one company in the medium impact category of the JSE’s SRI index – we were delighted to be recognised for our ongoing endeavours in this area.
We continue to be committed to the highest levels of corporate governance and ensuring that the values and ethical behaviour within the business reflects this commitment.
congratulations and thanks
It was with enormous pleasure that I was able to welcome Peter Bacon to the board of Woolworths. I personally have worked with Peter for some time and I know that his experience will add significant value to Woolworths business.
Zyda Rylands has also joined the Woolworths Holdings board. This is a celebration for our business as Zyda becomes the first black woman executive member of this board - a clear indication of our commitment to developing, recognising and rewarding talent.
Richard Butt will be retiring at the end of 2006. We thank him for his valuable contribution to the business over the past 17 years and wish him every success in his retirement, although I am sure we will continue to call on his expertise. Andrew Jennings, currently President and Chief operating officer of Saks Fifth Avenue in New York has been appointed Group managing director: retail for Woolworths. We look forward to welcoming Andrew to the executive team in December 2006.
We’ve had a long year of challenges as we juggle the demands of change and growth in the business. I’d like to thank my colleagues on the board for their dedication and inspiration during this year and commend the management and staff of Woolworths for delivering good results amidst this significant change.
Woolworths will celebrate its 75th birthday this year and I am looking forward to a year of continued growth and the delivery of some exciting retail initiatives that will add value to the Woolworths brand.
D A Hawton
