Woolworths: Trading update (May 27, 2020)

Cape Town, W Cape, SA (May 27, 2020) – 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, the Company provided 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).
       The Group expects 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.
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:
*Proactively engaging with the Group's South African funders - given the continued impact of the adverse trading environment across the Southern African operations (notably in FBH), the Group has had positive discussions with the 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. The Group has also successfully renewed its South African Revolving Credit Facility ("RCF") funding lines.
*The provision of funding support of AUD75 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 AUD25 million, to the extent that it may be required.
*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.
*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. *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.
*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: The Group expects to release a further trading update for the 52 weeks ended 28 June 2020 on SENS on or around 16 July 2020, ahead of the formal FY20 results on or around 27 August 2020.