Woolworths: shuffling deckchairs on the Titanic?

Woolworths is failing to capitalize from consumers wanting to shop more cheaply, as other value retailers benefit from price conscious shoppers choosing to trade down and make their purchases more locally. With both sales and margins falling, the retailer is in a perilous position as it approaches the key Christmas period without a chief executive.

Woolworths's trading updates are rarely crammed with upbeat news but the retailer's July 29, 2008 pre-close statement contained no crumbs of comfort at all for long-suffering investors. Group sales were down by 3.1% in the 25 weeks to July 26, 2008, with sales through Woolworths stores down by 3.2%. Woolworths traditionally makes a loss in the first half but with sales skewed towards low margin CDs and DVDs, and more clearance activity than usual, this loss is certain to be much larger than usual when the company reports interim results in September.

Sales were also down by 1% at EUK, the group's entertainment wholesaling business. The company blames an annualization effect from sales of Harry Potter a year ago, but a decision to cut down its back catalogue suggests that its problems are firmly entrenched. Even 2e, the company's joint venture with the BBC, produced underwhelming results, with year-to-date sales growth of 12.8%, which is a huge reduction compared to the 29.8% growth achieved in the first 19 weeks of the year. Because of this, the board has now postponed the expected sale of the business, a move that would have provided the group with much-needed funds.

The scale of the challenges now facing Woolworths makes it essential that a new chief executive is found quickly to replace Trevor Bish-Jones, whose resignation was announced last month. However this could well take some time, leaving the company leaderless in the run-up to the crucial Christmas trading period. The lack of a chief executive lengthens the odds of Woolworths making a full year profit, particularly as so many of the company's ills are deep seated. A full year loss, following on from a loss last year, could well trigger the break up of the group. Woolworths's shares have already fallen in value to 5p from 30p 18 months ago, reducing the company's value to less than GBP100 million. At this level its market capitalization is lower than the annual turnover of some Tesco Extra stores.

Woolworths now sees its future centered on operating a chain of small and medium sized stores, and is taking steps to sell off larger units, or sublet space to rival retailers. However, it is hard to escape the conclusion that the company is in terminal decline and potential revival strategies amount to little more than shuffling deckchairs on the Titanic as it shrinks in scale and becomes increasingly marginalized to secondary and tertiary high streets. As a value retailer Woolworths should, in common with pound shops, be benefiting from price conscious shoppers trading down and choosing to shop more locally. The fact that it is not doing so is deeply worrying.

Source: Verdict Research

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