Woolworths's focus on generating and preserving cash improves liquidity

Woolworths' has had to tightly manage working capital, cut back on discretionary costs and more.

Covid-19 has caused significant disruption to Woolworths Holdings, as indicated when the group reported in its results for the year-ended 28 June 2020. This disruption has had a material impact on the second half of the year reported on, resulting in a R1.4 billion profit before tax, down from R1.8 billion. 

Adjusted profit before tax also declined by 46 percent to R2.5 billion. 

Woolworths said in a statement that its primary focus during Covid-19 has been the health and wellness of its people, the safety of its customers, and the protection of jobs for its employees. 

Woolworths also undertook numerous initiatives that were targeted at stabilising operations, protecting liquidity, and strengthening the group’s balance sheet. “Our focus on generating and preserving cash included tight working capital management, the deferral of non-essential capex, cutting back on discretionary costs and securing relevant government relief support for employees,” the statement read. “This achieved the desired savings and improved liquidity and levels of net gearing.”

The impact of Covid-19 on the trading environment and Woolworths’ results made it necessary for the company to reassess the carrying values of its assets, including the right-of-use assets relating to its store leases arising from the implementation of IFRS 16. “Consequently, the carrying value of certain store assets has been impaired, which negatively impacted reported earnings per share.” 

Earnings per share were reported at 58.2 cents and headline earnings per share we reported at 119.8 cents, compared to -113.4 cents and 342.9 cents in the previous year respectively. 

The company said that, in addition, given the economic and trading uncertainty resulting from Covid-19, and the challenges created in reliably forecasting the timing of future taxable earnings, the group has elected not to recognise certain deferred tax assets arising from assessed losses in relation to certain entities. 

Group performance

Woolworths’ sales for the year were 0.1 percent lower than the previous year. The sales were significantly impacted by the temporary closure of the majority of Woolworths’ non-food stores, combined with the decline in foot traffic and resulting loss of trade.  

However, the easing of restrictions from the beginning of May resulted in some recovery in the last nine weeks of the second half of the year. 

As a result of these factors, the group reported a turnover and concession sales decline of 4 percent. But the loss of trade was partially offset by significant growth in and contribution from online sales across all businesses during and after the lockdown. 

“The resilience of our food business is underpinned by deep foundational capabilities. These, coupled with customer confidence and trust in our brand, resulted in the food business delivering an exemplary performance for the year,” Woolworths reported.

According to the results, Woolworths food sales peaked in March and April, with above-market growth continuing into May and June. Turnover and concession sales grew by 13.3 percent in the second half of the year, with a full year growth at 10.7 percent. “This was achieved notwithstanding the constrained environment, restrictions on trade of our hot food counters, wine alcoves and WCafe business, and the intermittent closure of specific stores with Covid-19 incidents.” 

Online food sales grew by 87.8 percen in the second half of the year. 

Other results include: 

  • Gross profit margin for the full year decreased by 3.5 percent to 44 percent
  • Expenses decreased by 2.8 percent
  • Operating profit decreased by 59.5 percent to R683 million

The company concluded that the trading environment in South Africa remains challenging and uncertain and is expected to remain so for the foreseeable future. The full economic impact of the pandemic is still unfolding and it expects consumer spending to remain constrained.