2020/05/27
WHLE - WOOLWORTHS HOLDINGS LIMITED - Further update on the impact of COVID-19, trading update and strategic initiatives [JSE Securities Exchange - SENS]
 
Further update on the impact of COVID-19, trading update and strategic initiatives

Woolworths Holdings Limited
(Incorporated in the Republic of South Africa)
Registration number 1929/001986/06
LEI: 37890095421E07184E97
Share code: WHL
Share ISIN: ZAE000063863
Bond code: WHLI
('the Company', 'WHL' or 'the Group')

FURTHER UPDATE ON THE IMPACT OF COVID-19, TRADING UPDATE and STRATEGIC INITIATIVES

Further to the operational update published by the Company on the Stock Exchange News Service
(SENS) of 6 April 2020, the spread of COVID-19 continues to have a pronounced impact on the
Group. Given these unprecedented times, we wish to provide shareholders with an update on the
trading and operational environment across the business and the strategic initiatives underway to
reposition the Group to deliver sustainable long-term shareholder value.

Trading update

As previously reported, Group turnover and concession sales in the first nine weeks (to 1 March) of
the second half of the financial year ("H2") was broadly in line with that of the prior comparable period
(+1.9% in constant-currency terms). The temporary closure of the majority of the Group's non-food
stores, coupled with the significant decline in foot traffic and consequent loss of trade, saw turnover
and concession sales decline by 18.5% in the subsequent eight weeks to 26 April (-18.8% in
constant-currency terms). The pace of decline has since slowed as lockdown restrictions have begun
to ease. The 2019 financial year included a 53rd week, which resulted in a shift in trading weeks in
2020 compared to the prior financial year. Adjusting for this, Group turnover and concession sales
grew by 4.2% in the first nine weeks of H2, versus a decline of 17.0% in the subsequent eight weeks
(all other sales growth figures referenced below adjust for this same shift in trading weeks to provide a
more comparable basis of performance).

We expect constrained trading conditions to persist over the remainder of the second half of the
financial year. Management has intensified its focus on liquidity, minimising operating and capital
expenditure and managing working capital across the Group. Investments in strengthening online
capabilities continue to be prioritised, given the growing importance of this channel. To stimulate trade
and manage inventory levels throughout this period, management has executed a series of focused
promotional and clearance initiatives targeted at generating and preserving cash, which will negatively
impact this financial year's gross profit margin.

Notwithstanding the considered actions taken by management, the wide-ranging effects of the
pandemic and consequent lockdowns will be likely to have an adverse impact on the Group's
Adjusted headline earnings per share (HEPS) and cash flow in the second half of the financial year. A
further trading statement to that issued on 6 April 2020 will be issued to provide specific guidance
once the Group is reasonably certain regarding the HEPS and earnings per share (EPS)
ranges for the 52-week period ending 28 June 2020.

Southern Africa

Woolworths Food: While the weeks immediately preceding the lockdown saw significant spikes in
trade, demand has since moderated with shopping patterns reflecting reduced footfall but increased
average basket size. Woolworths' foods business has been resilient throughout this period, supported
by strong relationships across the supply chain. Sales and concession sales in the first nine weeks of
H2 grew by 7.5% and growth accelerated to 17.4% in the subsequent eight weeks to end-April. Sales
growth in May has remained strong to date, despite trading conditions still being constrained by the
impact of the lockdown, social distancing, and the closure of our hot food counters, wine alcoves and
WCafé business. We continue to intensify our focus on enhancing our online platform to better service
the significant increase in demand through this channel.

Woolworths Fashion Beauty Home ("FBH"): The performance of our FBH business has been
materially impacted as a result of the extended national lockdown, which saw the temporary closure
of our stores up until 1 May. Sales in the first nine weeks of H2 grew by 1.9% but the ensuing eight
weeks to end-April delivered a decline of 61.4%. FBH stores have now reopened to sell essential
items only (which comprise of winter clothing, footwear, personal care and bedding). Online deliveries
in these essential categories have resumed with effect from 1 May and in addition online sales of all
goods has been permitted since 14 May, which has since stemmed the pace of the sales decline over
the most recent period. Our teams are well-prepared for a further lifting of lockdown restrictions as
South Africa moves to Level 3 from 1 June.

Woolworths Financial Services ("WFS"): WFS has been negatively impacted by the closure of
stores, a pull-back in non-essential spend and lower prevailing interest rates, all of which have placed
pressure on book and revenue growth. In addition, a deterioration in customer collections will increase
impairments for the second half of the financial year. In response, management has taken proactive
steps to increase collections capacity, review credit risk strategies and implement customer relief
programmes.

Australasia

David Jones ("DJ"): Although DJ has continued to trade in its large format stores through the period,
the impact of COVID-19 has had a significant impact on foot traffic and store sales. Sales and
concession sales for the first nine weeks of H2 were up 0.5% in local currency but declined by 35.8%
in the subsequent eight weeks to end-April. DJ's online penetration continues to grow strongly, with
sales in H2 to-date having doubled versus that of the prior comparable period. The easing of
restrictions in Australasia has also commenced, and we are seeing a positive uplift in footfall and a
commensurate, encouraging sales performance, across the DJ network of stores.

Country Road Group ("CRG"): Overall turnover within CRG has been more adversely impacted as a
result of the decision to close all stores given the challenge of maintaining social distancing protocols
across their smaller store formats. This resulted in a 50.4% drop in sales in local currency in the eight
weeks to end-April, versus an increase of 1.7% in the preceding nine weeks. Online sales remain
strong, with growth of 19% in H2 to date. CRG stores began their planned re-opening as of 22 May.

                                          Sales Performance

Sales growth by division, adjusted for                First nine weeks of       Second eight weeks of
the shift in trading weeks (percentage                            H2 FY20                     H2 FY20
year-on-year)
Woolworths FBH                                                        1,9                     (61,4)^
Woolworths Food                                                       7,5                        17,4
David Jones (A$)                                                      0,5                      (35,8)
Country Road Group (A$)                                               1,7                     (50,4)^
Group total (including concession sales)                              4,2                      (17,0)
^ Includes the closure of all stores for in excess of four weeks within this eight-week period

Current focus and strategic initiatives

Given the high levels of uncertainty and significant business disruptions during this period,
management has been focused on the health and safety of our customers and employees, stabilising
the operations, and cash flow. To this end, a range of cash generation and preservation initiatives,
which were expanded upon in our update of 6 April 2020, is being successfully implemented across
all business units.

The Board and management team have also initiated several key strategic projects across the
business, targeted at protecting and strengthening our balance sheet and establishing a platform
which enables us to position the Group for sustainable, longer-term growth.

In support of the strategic project work, a number of underpinning initiatives have been launched
including, amongst others, the following:

       1. Proactively engaging with our South African funders - given the continued impact of the
          adverse trading environment across the Southern African operations (notably in FBH), we
          have had positive discussions with our South African banks with regard to any potential
          covenants impacts. The business has significant liquidity headroom in terms of its
          forecast cash flows and existing facilities. We have also successfully renewed our South
          African Revolving Credit Facility ("RCF") funding lines.
       2. The provision of funding support of A$75 million to the Australasian businesses from
          WHL, in the form of a loan secured by a second lien. The funding support is conditional
          upon securing the suspension of covenant testing from the Australasian funders.
          Provision has also been made for further in-principle support to the business to the value
          of A$25 million, to the extent that it may be required.
       3. Proactively seeking suspension of covenant testing for the Australasian funding - the
          COVID-19 impact and the challenging trading environment is expected to reduce
          headroom for the June and December covenant periods. The lending banks have granted
          the requisite suspension of covenant testing and the process with the bondholders has
          commenced and is expected to be concluded by the end of the financial year.
       4. A review of the capital structure of the Australasian entities has been initiated and will
          include the restructuring of its borrowings to ensure a more sustainable funding structure.
          UBS Australia has been appointed to support this process and will conduct a full review of
          options relating to the Australasian property portfolio. Any proceeds generated as a result
          of our capital management initiatives will be applied to the repayment and cancelation of
          debt facilities.
                 -  As a first measure, with specific regard to the status of the sale of the Bourke
     Street Menswear building, contracts have been exchanged between DJ and the
                    preferred purchaser. The sale price achieved is in line with expectations and final
                    settlement is anticipated before the end of July 2020 following the fulfillment of
                    customary conditions precedent.
       5. Discussions with Australasian landlords are underway in relation to an accelerated
          restructure of the David Jones network of stores/locations and reduction in floor space.
       6. The Board believes that it is in the best interest of the Company for distributions to WHL
          shareholders to be suspended until such time as the situation arising from COVID-19
          stabilises. The Board will consequently not declare a final FY20 dividend and will consider
          dividends thereafter in the context of the conditions prevailing at the time.

Conclusion

We expect the challenging and fluid operating environment brought about by the pandemic, to
continue for the foreseeable future. While the business is well prepared to take full advantage of any
improvement in trading conditions as government restrictions continue to ease, these circumstances
also present opportunity to take clear and decisive actions to improve the effectiveness of our
business model.

In these unprecedented times, the Board and management team will continue to act swiftly and
decisively to protect the Group's financial position, to optimise its liquidity and capital structure, and to
reposition the business to deliver sustainable long-term shareholder value.

We extend our sincere gratitude to our customers for their ongoing support, particularly during these
times and also recognise our highly dedicated team members for their substantial contributions and
ongoing commitment to our Company.

We expect to release a further trading update for the 52 weeks ended 28 June 2020 on SENS on or
around 16 July 2020, ahead of our formal FY20 results on or around 27 August 2020.

The information contained in this announcement has not been reviewed or reported on by the
Group´s external auditors.

Constant Currency Information

The constant currency information contained in this announcement has been presented to illustrate
the impact of changes in the Group's major foreign currency, the Australian dollar. In determining the
constant currency turnover and concession sales growth rate, turnover and concession sales
denominated in Australian dollars for the current periods from 30 December 2019 to 1 March 2020
(first nine weeks), and from 2 March 2020 to 26 April 2020 (second eight weeks) have been adjusted
by application of the aggregated monthly average Australian dollar exchange rates for the prior
periods from 24 December 2018 to 24 February 2019 (first nine weeks), and 25 February 2019 to 21
April 2019 (second eight weeks). The foreign currency fluctuations of our rest of Africa operations are
not considered material and have therefore not been applied in determining the constant currency
turnover and concession sales growth rate. The aggregated monthly average Australian dollar
exchange rates are 9.95 (first nine weeks) and 10.93 (second eight weeks) for the current periods and
9.93 and 10.12 for the prior periods, respectively.

The constant currency information, which is the responsibility of the Group's directors, has been
prepared for illustrative purposes only and may not fairly present the Group's financial position,
changes in equity, cash flows or results of operations.

The information contained in this announcement, including voluntary estimated financial information
and constant currency information, has not been reviewed or reported on by the Group's external
auditors.

          H2 FY20                         H2 FY19                             Exchange    Exchange
                                                                             rate used   rate used
                                                   in H2       in H2
                                                                                              FY19

First     30 December 2019 to 1           24 December 2018 to 24                  9.95        9.93
nine      March 2020, both days           February 2019, both days
weeks     inclusive                       inclusive
of FY20
Second    2 March 2020 to 26 April        25 February 2019 to 21 April           10.93       10.12
eight     2020, both days inclusive       2019, both days inclusive
weeks
of FY20

Contact:
Reeza Isaacs (Group Finance Director) 
ReezaIsaacs@woolworths.co.za
InvestorRelations@woolworths.co.za

Cape Town
27 May 2020

Sponsor:
Rand Merchant Bank, a division of FirstRand Bank Limited

Date: 27-05-2020 07:05:00
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