Woolworths: Interim result 2018

Woolworths was expected to outperform Coles in the first half of 2018 – and it did. Woolworths' Australian Food business reported same-store sales growth of 5.0% in the second quarter, well above Coles 1.4% (see Wesfarmers: Interim result 2018). But it's going to become harder for Woolworths to outperform from this point, which explains the weaker share price today.

Overall, Woolworths' interim result was pretty good. Sales rose 4% to $29.8bn while underlying net profit rose 15% to $902m. The driver was the ongoing turnaround in the Australian Food business, where operating profit jumped 11% and margins rose from 4.4% to 4.7%  (yes, margin expansion was what got Woolworths into trouble a few years back).

Also strong was the Hotels business, which lifted earnings an impressive 17% (on top of the 12% rise reported in 2017 – see Woolworths: Result 2017). As expected, New Zealand Food earnings fell 8% as the company invested in price and service.

Big W continued to struggle, with a small loss, but sales stabilised and management pointed to early signs of progress. For 2018 the business is likely to generate a loss of $80m–120m.

All in all, Woolworths reported a result in line with expectations. It has been an impressive turnaround from the turmoil of two years ago but most of the upside has been reflected in the share price. The stock trades on a 2018 forecast price-earnings ratio of 22 (but less if you back out the Big W losses).

We're lifting our Buy price slightly to reflect the progress but we're still some way from an upgrade. HOLD.

Note: The Intelligent Investor Equity Income Portfolio owns shares in Woolworths. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.