Woolworths AGM

Woolworths’ share price has increased 2% today after the company confirmed that it expects net profit to increase 4-7% in 2015. According to Woolworths chief executive Grant O'Brien sales are improving following the first quarter results that were a fair bit behind those of Coles; food and liquor sales grew 3.9% compared to 5.8% for Coles in the quarter ending 30 September. ‘Second quarter sales are heavily reliant on the next six weeks, but we are encouraged by trading to date’.

It was a relief to shareholders that have watched the share price slide around 20% from a high of $38.92 in April. That’s about an $8bn fall in market value, or two Aristocrat Leisure’s. Several brokers have drastically cut their 12-month price targets, with at least one valuing the stock at $25, which would put the stock on a price-to-earnings ratio of around 14 and a 5.2% fully franked dividend yield.

The market is currently betting that Aldi’s success in the UK will at least partly be replicated here. The share prices of blue chip supermarket operators like Tesco have fallen over 50% recently as discount grocers like Aldi and Lidl have caused a price war and exposed the over-investment of companies like Tesco. In response Tesco has cut its dividend by 75% and is selling land for residential development, but Goldman Sachs estimates the value of some properties with the poorest performing stores could fall 35-70%.

We’re currently more concerned for Metcash and its IGA customers than the big two, Woolies and Coles. But not ones to leave things to chance we’re currently performing a deep dive on Woolworths and the Australian grocery industry to work out how margins in the industry could change and what the impact on Woolworths would be.

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