Woolworths
Recommendation
Woolworths reported weak sales growth in the second quarter of 2012. Same-store sales in its food and liquor business grew just 1.1% which, given costs are growing at a greater rate, will lead to margin pressure if faster sales growth doesn’t resume at some point. While there were some temporary industry-wide effects—8% fresh produce price deflation over the quarter and cool December weather—Coles is expected to report stronger growth when it releases sales results tomorrow.
Woolworths is peddling hard to make up the ground lost to Coles, which continues to outflank its larger competitor in the marketing war. Yesterday’s promise by Coles to cut produce prices by up to 50% needs to be seen in the light of significant fresh produce deflation but will still resonate with value-conscious shoppers. While Woolworths is reviewing its marketing and ranging, the effects won’t be obvious for many months.
There was something of a ‘relief rally’ following Woolworths’ sales results, with investors reassured the company didn’t downgrade profit guidance. But shareholders should prepare themselves for a flat result in 2012 and perhaps worse in 2013 if sales growth doesn’t resume.
Although insignificant in valuation terms, the other news was that Woolworths regards its consumer electronics business Dick Smith as unsaleable in its present form. The company will take a $300m writedown to downsize the business before attempting to sell the remaining stores. We expect buyers will be few—JB Hi-Fi appears to have ruled itself out—and the sale price to be nominal.
The share price is down 3% since Woolworths’ Masters nails it on 12 Jan 11 (Long Term Buy – $25.62). The recommendation remains LONG TERM BUY and the price will need to be below $23.00 before we’d consider upgrading.
The Growth and Income portfolios own shares in Woolworths.