Chairman
chairman’s letter
dear shareholder
The year in review has been a year in two distinct parts, with the trading environment shifting significantly in the second half. Confident consumers in the first quarter continued to fuel growth at similar levels to that experienced in the previous year. From September 2007 onwards, however, consumer confidence began to fall rapidly as interest rate increases and rising petrol and food prices took their toll.
By the end of June 2008, retail growth had slowed dramatically, with inflation reaching a 5-year high during the period, averaging 13.1%.
The swift downturn in consumer spending resulted in a sharp reduction in sales in the second half. Furthermore, in line with the increasing levels of bad debt experienced by retail and financial services lenders, Woolworths experienced a marked increase in bad debts. Woolworths has intensified its focus on the quality of new credit granted and credit collections.
Merchandise offers were reviewed to ensure that Woolworths was more relevant to the changing economic environment and the price architecture was examined. Woolworths offer in the clothing and food businesses is now extremely competitive. In addition, the focus on reducing costs resulted in significant savings in the second half of the year.
Sales growth in clothing and general merchandise was disappointing, up 6.1%. Food showed better growth, at 18.8%. By the end of the year, our clothing market share had deteriorated to 15.3% (2007: 15.5%) and food market share had been maintained at 9.2%.
The Australian economy was impacted to a lesser extent and our Australian subsidiary, Country Road, performed well with profit before tax up 54.8% in Australian Dollar terms.
Operating margin declined from 9.9% to 9.2% mainly impacted by an increase in bad debt. Adjusted headline earnings per share grew by 4.3% to 124.8 cents per share. ROE declined from 35.1% to 27.6% and the average weighted cost of capital increased to 14.8% (2007: 13.3%). A total dividend of 79.0 cents was returned to shareholders (2007: 76.0c).
On 16 April 2008 we announced that Absa had acquired a significant portion of our financial services business subject to the fulfilment of certain conditions precedent. One of these conditions, namely the approval by the South African Competition authorities, has been received. The transaction is expected to be completed by the end of September. Absa’s significant banking expertise, combined with the Barclaycard brand and our strong retail footprint, should set this business up for significant success into the future.
After completion date of the transaction, the board’s intention is to distribute R2.25bn arising from the disposal together with the net cash realised from the transfer of the financial services assets.
We expect to distribute R750m by way of a special dividend and, subject to the prevailing market conditions at the time, an open market share repurchase amounting to R1.5bn.
Woolworths Good business journey has gained international recognition, winning the “International responsible retailer of the year” award. Locally, I am delighted that we have been recognised as an organisation with one of the most innovative environmental strategies, winning the Mail and Guardian “Greening the future” award. Our challenge now is to meet our stringent 5-year targets.
We continue to place emphasis on transformation. The BEE employee share ownership trust was implemented last year and has paid its first dividends to staff. The trustees were elected and held their first meeting during the course of the year. We look forward to their contribution and thank them for their commitment.
We still have a great deal of work to do to reach our 2012 target of becoming a level 4 contributor and we will continue to focus on skills development, preferential procurement and the other pillars of the dti scorecard. We consider these initiatives as crucial to support transformation in South Africa and to grow our business.
2009
We expect the effects of rising inflation and high interest rates to continue to impact consumer spending for some time. Slower consumer spending and dampened consumer demand will affect growth across the retail sector.
The focus for the team in the next year will be to ensure that costs are tightly controlled without compromising service in stores and investment in future growth. Accordingly, the roll-out of convenience food stores will still continue, albeit at a slower pace. Woolworths store modernisation programme will be ongoing, and investment in key infrastructure, such as financial systems, will continue.
Woolworths merchandise offer will remain extremely competitive and relevant, with an ongoing commitment to the Woolworths values, particularly quality and constant innovation.
The team will continue to focus on completing the transaction with Absa and ensuring that the new venture is set up for a sound and sustainable financial services business for the future.
appreciation
During the year Mair Barnes and Judy Dlamini resigned from the board. I would like to thank them both for their contribution. In May 2008 Richard Inskip resigned. On behalf of the board I would like to thank him for his significant contribution and wish him every success in his future.
I would also like to thank Simon and his team for their hard work in what has been a very difficult year for them. I wish them every success in the next year, in what we expect to be another tough trading period. Finally as always, I would like to thank my colleagues on the board, for their support and invaluable guidance.
D A Hawton