director's report - woolworths holdings limited

finance
director’s report
financial framework
From a financial perspective, Woolworths is
managed within a framework that optimises
the use of its financial resources.
Primary buying margins are strictly managed,
underpinning the value proposition of our
quality merchandise. We have embarked on a
programme to simplify our business by
removing non-value adding activities, which will
reduce operating costs and increase flexibility.
In addition, a clear focus on productivity is
aimed at leveraging growth in operating profit
until optimal operating margins are achieved.
On the balance sheet, our major asset is our
debtors book, consisting of the Woolworths
Card, personal loan and Visa card products,
which, apart from the Woolworths Visa card, all
earn interest at the usury rate. Sophisticated
credit vetting and risk management processes
and systems ensure the maintenance of a high
quality book. Investment in inventory is
relatively low due to the high stock velocity of
our business model and tight control by our
merchandise groups.
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annual report

Group turnover from continuing operations rose by 24.2% to R8 421,4m. Woolworths grew sales
22.6% in the 53 weeks to June to R7 302,0m, compared to a 52 week period last year, with the impact
of the additional week adding approximately 2.3%. Sales on a comparable store basis increased 15.5%
against last year. Consumer spending in South Africa was positive throughout the period with Textiles
sales for the 53 weeks increasing by 17.7% against last year (12.2% on a comparable store basis) and
Food sales by 28.7% against last year (18.7% on a comparable store basis).
Total trading area in Woolworths grew 4.2% to 333 692m 2 as a result of 13 new store openings, which
added 8 800m 2 . Eight stores, totalling 7 150m 2 ,were converted to the franchise format, which now
accounts for 65 002m 2 of the total trading space.Textiles footage now totals 266 635 m 2 (62 119 m 2
franchise) and Foods footage 67 057m 2 (2 883m 2 franchise).
Country Road’s revenue from continuing operations grew by 3% in Australian dollar terms to
A$207m, but translated into 36% growth in rand terms, to R1 125m. After the closure of the USA
operations, Country Road now trades from 44 stores with a total footage of 23 560m 2 .
Gross profit margin in Woolworths, increased marginally to 31.4%, but fell from 52% to 50% in
Country Road due to increased promotional activity to counter significant discounting among
competitors and an unusually warm winter.
Interest received increased 20.6% to R355,5m. R341,7m was earned by Woolworths Financial
Services, with the Woolworths Card growing in line with sales and the personal loan offering showing
strong growth. Growth in income was constrained by the usury rate, which, for several months in the
second half, failed to keep pace with increases in the prime lending rate.
Operating expenses were well managed during the year growing 17.5% in Woolworths, as a result of
increased trading activity, whilst Country Road’s costs in their continuing operations were 5.9% lower
in Australian dollar terms as a result of head office rationalisation following the closure of the USA
operations. Costs were 22.6% up in rand terms.A large portion of the operating costs in Woolworths
are variable, particularly in the Foods business, and move in line with the increase in
sales volumes.
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annual report

Operating profit from continuing operations increased by 45.8% to R685,2m, Woolworths
contributing R663,1m and Country Road R22,1m, although the latter benefited from second quarter
A$ profits being translated at an exchange rate significantly weaker than the rate at which first quarter
A$ losses were sustained.
Finance costs increased 8% in Woolworths as a result of strict working capital management during
the year and a higher level of cash resources for a large part of the year as a result of property
disposals in December 2001. In Country Road, borrowing costs increased A$0,8m to A$1,1m due to
higher cash flow requirements experienced in the first half of the year.
Net profit before tax and exceptional items, from continuing operations, increased 47.7% to
R599,2m.The exceptional items relate to a R17,2m impairment of the Claremont store property after
having taken the decision to relocate into Cavendish Square; goodwill amortisation of R12,1m arising
mainly from the acquisition of inthebag from Wooltru; a loss of R4,8m on the disposal of a listed
investment and a provision of R7,4m in respect of an indemnity given by the company.
The effective tax rate, from continuing operations before exceptional items, was down from the
previous year at 32.1% (2001: 33.9%) reflecting the benefit of the assessed loss in Country Road,
enhanced by the translation benefit of the rand’s sharp decline.
Discontinued Operations: Country Road’s exit from the USA market resulted in a write off of net
assets amounting to A$18,9m and other costs and provisions of A$5,0m, which translated to R122,6m
after minority interests.
Capital expenditure amounted to R335,0m offset by proceeds on disposals of R146,7m, R108,0m of
which related to the sale of certain non-strategic properties for which long term leases have been
entered into.
Shares issued under the share purchase scheme raised R41,3m, whilst shares totalling R134,7m,
repurchased by a subsidiary company as treasury stock under the shareholders’ authority granted at
last year’s annual general meeting, were repurchased at an average price of R4,05 per share.
finance direc
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annual report

Total assets increased by 8.9% to R4 063,8m,
mainly attributable to the growth in the
debtors book, whilst net capital expenditure
was largely in line with the depreciation charge.
The R131,6m write-off resulting from the
closure of Country Road’s USA operations was
substantially offset by the R87,4m increase in
the value of the remaining assets of Country
Road on translation.
The debtors book, comprising card and
personal loan products, and including our
funding of the Woolworths Visa Card Joint
Venture with Mercantile Bank grew by
R364,8m and now totals R1 800,5m. Bad debt
levels continued to be well managed during the
year and improved recoveries led to a net bad
debt level of 2.7%.The doubtful debt provision
remains conservatively calculated.
the state in taxes, 2.1% to lenders, 7% to
shareholders, and 22.0% was retained in the
business.
The debt:equity ratio of 15.8%, which was
exaggerated as a result of the 53rd week net
cash outflows, reflects the strong balance sheet
position of the group. Return on equity, based
on attributable earnings from continuing
operations, improved to 17.2% from 13.5% last
year, indicating the effect of the improved
trading result on a leaner balance sheet.
Looking forward our goal is to continually
improve the return on our shareholders’ funds
within the group’s financial framework.
Banking facilities totalling R1 549,3m, are
available to the group which greatly exceeds
our estimated peak funding requirements.
Interest rates and foreign exchange exposures
are managed within strict treasury policy
guidelines. At the end of the year, R150m of
short-term borrowings were hedged until April
2003, and all foreign exchange liabilities were
covered by FEC contracts.
Value of R2 093,8m was added during the year
under review from continuing operations.
59.2% was allocated to employees, 9.7% to
tor’s report
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annual report