Woolens to save even more space as the clothing turnaround drags on

By June next year, Woolworths will have reduced the retail space taken up by its Fashion, Beauty and Home (FBH) stores by almost a fifth in a bid to restore profitability.

In June 2020, these stores occupied 440,000m2with a projection as it would decrease to 382,000m2 by June 2023. Last week the group said it saw that number drop to 357,000m2 – 7% more than he originally expected. She sees this number falling further by June 2024, to 354,000m2.

Chances are the cuts will be even more aggressive. In a footnote – for the first time – Woolies indicates that “these projections are related to contractual agreements and do not reflect negotiations to reduce space currently in flight”. In other words, these are the signed and sealed reductions already agreed with the owners.

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Since the arrival of CEO Roy Bagattini, the group has been actively managing its commercial space down to the smallest detail to generate profitability per square meter. Even in stores, it reallocated space within the FBH category. Higher-margin beauty, for example, now occupies a prime position in its largest stores, while it has mostly increased the space it devotes to homewares. In some stores where he was unable to reduce total space, he expanded Food’s share of the store.

The number of FBH (“apparel”) stores will decline by only 8% over the period 2020 to 2023 – less than half the rate at which it is shrinking space.

This means the retailer is actively returning space to owners and/or expanding food space in its full-service stores.

The 2023 projection is somewhat of an anomaly as the group sees the number of FBH stores at 196 in June this year (compared to 199 at the end of 2021), which will increase to 198 in June 2023 before falling to 195 the year next. This appears to be due to timing, where it has likely committed to adding stores in specific locations over the next 12 months before leases expire for stores it plans to close.

Over the past year, it has reduced what it describes as “unproductive space” by 6%, resulting in retail densities – or sales per square meter – increasing by more than 10%.

Underperforming Australian brands

Tellingly, this will also reduce the space occupied by Country Road Group’s brands in South Africa.

This means that even these Australian brands are underperforming what Woolies demands from a turnover and profitability perspective. The group expects a reduction of 15% by June 2023. The number of stores will drop from 84 today to 78 by next June, a reduction of 8%. Again, it is shrinking space faster than the number of stores/concessions in its larger Woolies stores.

In the six months to December 2021, sales at FBH (which includes Country Road brands in South Africa) increased 4.2% year-on-year (6.1% higher if one “adjusts clearance sales”).

Worryingly, sales growth in these categories slowed markedly in the last six weeks of the year, typically the peak retail period.

(In fact, his sales over the past six weeks actually contracted compared to 2020, which it says depends on the timing of its summer clearance.) He adds that “the slowdown in business momentum…was due, in part, to the underperformance of certain womenswear categories.”

During the six-month period, womenswear sales increased 0.7%, while “beauty and home rose 3.5% and 10.3%, respectively.”

What’s up with women’s fashion?

Women’s fashion remains a problem area, despite the group’s years of effort to fix this part of the business.

Speaking to investors last week, Bagattini answered the question, “Why aren’t you making more progress in turning your fashion business around, especially from a top-line perspective?” – head on.

He highlighted challenges historically related to both strategy and execution. The retailer is “confident” in its renewed strategy for FBH.

So far it has:

  • Lightened its offering and canned several of its labels, including Studio W;
  • Defined categories where it says “must win”;
  • Successfully increased full-price sales (avoiding markdowns), including in its struggling Womenswear division;
  • Improved commercial densities; and
  • Improved operating margin.

But he says he’s not where he needs to be yet on the enforcement front. There is a renewed focus on buying to ensure it has the right fashion in stock at the right price. Additionally, he notes that availability needs to be improved, especially in his baselines.

Bagattini remains optimistic, saying “the momentum will build from here.”

Read: Roy Bagattini takes over as Woolworths helm as profits plummet

FBH’s turnover for last year was R12.9 billion. This will exceed R13 billion in the year to June. By 2024, it is aiming for revenue of between R15 billion and R16 billion. This means that it must achieve growth of between 7.5% and 11% next year (FY23) and the following year (FY24).

The fact that he is convinced to achieve this “space reduction notwithstanding” illustrates how bloated and unproductive much of his FBH stores have become.

The group wants to ensure that its gross profit margin exceeds 48% (which it still generated five years ago), against 45.5% currently, and that it can pass its adjusted profit margin before interest and taxes (Ebit) above 12%, against 8.4% currently.

He argues that there are “fruits within reach in FBH, with significant margin to improve profitability in fashion, while simultaneously increasing profitable market share in beauty and home.”

Get it right, and he thinks the market will reward the company appropriately (or, in his “jargon,” it “represents a significant delta in the group’s value reset”).

Still, Woolworths admits the food industry will remain the ‘engine room’ of ‘value creation’ for the group.

Read: Quit Aus and list Woolworths Food separately, according to top retail analysts

Trading over the first eight weeks of the year looks promising with sales up 7.3% (after adjusting the calendar of sales). Yet the earlier opening of schools has had an impact on this growth.

Bagattini talks about “relentlessly focusing on execution”.

Much is straddling the next 12 months.


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