Woolworths’ Apparel Struggles Drag Down Earnings Despite Strong Food Sales

Retail giant Woolworths is grappling with underwhelming apparel sales across South Africa, Australia, and New Zealand, dampening its financial outlook despite a strong performance in the food sector.

The company’s latest trading update for the 26 weeks ended 29 December 2024 revealed a 5.7% increase in total turnover and concession sales, with a 6.2% rise in overall sales. However, a sharp drop in apparel sales is expected to impact headline earnings, which are forecasted to decline by 22% in South Africa and 27% in Australia.

Apparel Performance Drags Down Earnings

Woolworths’ Food division continues to thrive, reporting an 11.4% increase in sales, with online sales surging by 37.2%, largely driven by Woolies DASH, which recorded 49.2% growth.

However, its Fashion, Beauty, and Home (FBH) division underperformed, with turnover rising by a modest 2.5%. Sales growth in the last eight weeks of the period slowed to 0.9%, largely due to supplier delays and system changes at its distribution centre.

While Woolworths’ Beauty business showed strong 17.3% growth, apparel sales in Australia continued to decline. The Country Road Group, currently undergoing restructuring, saw sales fall by 6.2% overall and 7.8% on a comparable-store basis.

Market Insights and Future Challenges

Speaking to BusinessTech, Chantal Marx, Head of Investment Research at FNB Wealth and Investments, described Woolworths’ financial guidance as disappointing, with headline earnings tracking below full-year expectations.

“The weaker-than-expected performance of the apparel business in South Africa and Australia will impact the group’s earnings, despite strong food sales,” said Marx.

Consumer sentiment in South Africa is improving, supported by moderating inflation and lower interest rates. However, in Australia, high interest rates and rising living costs continue to weigh on consumer spending.

Strategic Moves and Outlook

Woolworths recently sold the David Jones flagship store property in Melbourne for AU$223.5 million, a move that will strengthen its balance sheet in the short term. However, Marx warns that the loss of rental income may negatively impact earnings in the medium term.

Despite challenges, Woolworths remains fairly valued with a forward PE ratio of 14.1 times, suggesting neither a cheap nor expensive stock at current levels.

The company’s food business continues to be its stronghold, but unless it can revive apparel sales, earnings pressure is likely to persist.

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