Woolworths warns on Australia, invests in South Africa food unit

Woolworths said trading in its Australian apparel business slowed sharply at the end of the first half, while stepped-up investment in its South African food division weighed on margins.

The Australian market “is highly promotionally driven,” Chief Executive Officer Roy Bagattini said in an interview Wednesday. “There’s not much that you buy in Australia today that is not on sale or not with a discounted price ticket. So those businesses are sitting with a lot of inventory, particularly in discretionary categories.”

In South Africa, the Cape Town-based company added capacity at its Midrand food-distribution center. Food accounts for 64% of total revenue and there are “a number of new opportunities we are going after” especially in food services, Bagattini said. That includes Woolworths cafés, coffee shops, takeaway restaurants and school tuck shops.

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The cost of the new food-distribution center, together with more discounts to clear excess inventory and lowered prices on children’s clothing, pressured profit margins. Net income fell 33% to R1.48 billion ($90 million), Woolworths reported earlier.

Still, cheaper children’s clothing is boosting sales with the recently introduced winter range trading 28% higher, the CEO said.

“We made a strategic call a little while ago to really go after kids and baby,” Bagattini said. “We see big market-share opportunities,” as well as “significant cross-shop opportunity between the kids category and apparel and the food customer.”

The stock was little changed after declining as much as 2.2% and gaining 2.5% in Johannesburg. It has dropped 8.6% this year, the biggest retreat among clothing sellers on the broader South African retailers’ index, which has lost 4.5% over the period.

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