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Profitability fell at Woolworths’ consumer finance business as expenses grew faster than revenue.

August 24, 2007

By Tom Robbins

Cape Town – Profitability fell at Woolworths’ consumer finance business as expenses grew faster than revenue.

Expenses at Woolworths rose 25.1 percent to R5.4 billion in the year to June, while revenue was up 23.1 percent to R18.64 billion. But net profit still climbed faster than sales, owing to once-off gains.

Woolworths chief executive Simon Susman said yesterday that although bad debts had risen, the main reason for the profit fall in its lending book had been that before April the government did not allow retailers to pass on higher interest rates to customers. The government now allows credit retailers’ lending rates to track interest rate changes.

Woolworths is the only major retailer to fund its consumer loans out of debt. It experienced a margin loss as its borrowing costs rose but the government-regulated interest rates remained fixed.

Referring to higher bad debts, Susman said the firm had granted credit aggressively in the run-up to the June introduction of the National Credit Act, which makes lending criteria stricter for riskier clients. Aggressive lending was by its nature riskier.

Susman expected the bad debts “to work their way out of the system over time and flatten out, unless there are another couple of interest rate hikes”. The firm had since tightened its lending criteria.

Despite the fall in lending book profitability, net profit still managed to grow faster than sales, due to a lower tax charge in Australia and the once-off sale of a property in Midrand for R55 million.

Net profit lifted 28.6 percent to R1.07 billion, compared with a year ago, while revenue was up by 23.1 percent.

Susman said that despite slowing sales growth in the second half, that was expected to continue, as up to 32 new food stores would be opened.

Woolworths shares rose 0.51 percent yesterday to R19.70, while the general retailers index rose 1.03 percent.