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updated: 2/13/2014 7:40 AM

Woolworths profit climbs as higher earners support sales

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Bloomberg News

Woolworths Holdings Ltd., a South African food and clothing retailer, said first-half profit increased 22 percent as demand from higher-income shoppers boosted sales, even as growth in the economy slows.

Net income at the seller of organic foods and international clothing brands such as Country Road rose to 1.6 billion rand ($145 million) in the 26 weeks ended Dec. 29, the Cape Town- based retailer said in a statement today. Sales rose 16 percent to 19.5 billion rand and basic earnings advanced 18 percent to 1.5 billion rand.

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Woolworths's performance ran counter to slowing sales growth among other South African retailers including Shoprite Holdings Ltd., the country's largest food retailer, and Truworths International Ltd., the biggest listed clothing chain. They said last month that sales growth declined as consumers struggle to repay debt amid rising unemployment, with lower- income earners particularly under pressure.

While economic conditions in South Africa will be "tougher as the year progresses," the country's higher earners are "less constrained and more willing to spend," Woolworths Chief Executive Officer Ian Moir said in a presentation in Cape Town. Trading for the first six weeks of the second half of the year "has been positive, and we expect sales growth to be broadly in line with the first half."

The stock slumped as much 4.3 percent and traded 3.9 percent lower at 58.94 rand as of 12:48 p.m. in Johannesburg. The eleven-company FTSE/JSE Africa General Retailers Index was down 1.9 percent.

Cash Retailer

Woolworths is "primarily a cash retailer and doesn't have the drag of bad debt that some of the other" South African companies do, Alec Abraham, an analyst at Afrifocus Securities in Johannesburg, said by phone. "Even so, basic earnings growth of less than 20 percent will disappoint the market."

The impact of a weaker rand, which has fallen 4.9 percent against the dollar this year, will be relatively minor in the second half as the company paid for clothing and general merchandise six months in advance, Moir said. A declining local currency will be felt more in the first half of fiscal 2015, when clothing and general merchandise will have "low double- digit" inflation, he said.

Woolworths, like many of its local competitors, is expanding on the continent outside of its home market, including Kenya, Botswana and Namibia. The company has cut prices in Kenya without reducing profit, and plans to do the same across its African markets, Moir said.

Woolworths said in November it would close its three Nigerian stores because of high rental costs, duties and difficulties with its supply chain. The company won't consider a return to the country "for some time," Moir said.

The company will pay a half-year dividend of 101 cents, 17 percent higher than for the same period last year.

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