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Highlights
- Woolworths' share price has dropped 25% since June 2023 and nearly 20% since late August 2024, reaching a 52-week low of AU$29.79 due to declining supermarket performance following the pandemic and rising inflation.
- In its first-quarter FY25 results, Woolworths reported total group sales of AU$18 billion, up 4.5% year-over-year, with strong e-commerce growth of 21.2%.
- Analysts have mixed views on Woolworths' future, with UBS maintaining a neutral rating and reducing its price target to AU$31.25, indicating a potential 5% upside.
Woolworths Group Ltd (ASX:WOW) has seen its share price slide by 25% since June 2023 and nearly 20% since late August 2024. On Friday, the company’s stock dipped to a 52-week low of AU$29.79, reflecting a steep decline in its supermarket business following the pandemic-era highs and periods of elevated inflation.
Despite the downturn, some analysts suggest there could be value opportunities, given that demand for groceries remains steady. In its first-quarter FY25 results, Woolworths reported total group sales of AU$18 billion, up 4.5% year over year. The company saw robust e-commerce growth of 21.2%, with Australian food sales rising by 3.8% to AU$13.6 billion, and Australian business-to-business (B2B) revenue increasing by 6.9%.
However, challenges are weighing on investor sentiment. Woolworths has been aggressively promoting discounts to offer greater value to shoppers, a strategy that has boosted sales but eroded profit margins. The e-commerce segment, while experiencing substantial growth, has also added pressure to the company’s margins. Consequently, Woolworths indicated that its Australian food operating profit (EBIT) margin would be "below" prior expectations. For the first half of FY25, the company projects EBIT to range between AU$1.48 billion and AU$1.53 billion, down from AU$1.6 billion in HY24, due in part to an additional AU$40 million in supply chain costs.
Another negative factor is the continued inflationary impact on operations. While supermarket inflation, excluding tobacco, fell by 0.8% in the first quarter, the previously high inflation environment had artificially inflated revenue for comparable goods, a trend that has now slowed. The company also highlighted that cost-of-living pressures are likely to persist through FY25, prompting a focus on value offerings during the crucial holiday season. Additionally, Woolworths expects wage cost growth to remain elevated, further straining profitability.
Analysts are split on the outlook for Woolworths. UBS, for instance, raised concerns about Woolworths’ increased promotional activities and rapid online sales growth negatively affecting margins. The brokerage also criticized the company for its approach to capital and operating expenditures, emphasizing the need for cost-saving measures, though it remains skeptical about execution capabilities.
UBS maintains a neutral rating on Woolworths shares, setting a reduced price target of AU$31.25, down from AU$33. This target represents a potential upside of roughly 5% from the current share price. However, UBS also warned of a likely dividend cut in FY25, with the annual dividend per share expected to fall to 94 cents, translating to a dividend yield of 3.1%, excluding franking credits.
Woolworths is also focusing on the expansion of its 'W Living' division, which includes Big W, PETstock, and newer ventures like Healthy Life and Woolworths Market Plus.
