Woolworths Limited (ASX: WOW) is one of those stocks that is under some pressure lately. While the share price has staged a modest recovery in recent sessions, there are mounting concerns about the future direction of the Fresh Food People.
But there are three events in particular in 2015 that will result in sharp share price reactions if they occur.
- Downgrade: At the beginning of this financial year Woolworths management committed the company to net profit growth of a respectable 4%-7% in 2015.
However, the market doubted the company's ability to hit that target, leading to a weakening share price in 2014. In response, management re-affirmed this guidance at the November AGM.
However, there have been strong indicators after that time from other retailers, including Kathmandu Holdings Ltd (ASX: KMD) and OrotonGroup Limited (ASX: ORL), that the Christmas trading period was a difficult one. While a seller of milk, bread and turkeys should be somewhat insulated from lower spending, a quieter than expected Christmas period would make it extremely difficult to meet that 4%-7% guidance.
Expect severe downside risk to the share price in the event of any downgrade to these expectations.
- Masters: Masters has been a thorn in the side of current management for years now. Woolies' adventure into hardware was named "Project Oxygen". This was because it was hoped it would starve the jewel in the Wesfarmers Ltd (ASX: WES) crown, Bunnings, of the oxygen that allowed it to power the turnaround of the rest of the group.
Instead, it is doing the opposite, harming the stellar Woolworths supermarket business that generates the most profits for the company.
The specific event risk attached to Masters is an impairment charge or writedown on the value of the investment on the company's balance sheet. This would represent a loss of millions of dollars on the paper value of the investment, which would in turn lower total group profits.
Investors of all sizes would see this as a failure and mark down the company accordingly.
- Legal action: The Australian consumer watchdog, the ACCC, recently won a landmark victory against Coles for unconscionable conduct against suppliers.
The charges were raised because of improper pressure placed on suppliers by the supermarket giant. It required its suppliers to fund marketing and promotion campaigns from their own pockets, which allowed Coles to maintain its own profits.
The practice is called "margin backfilling" in the industry, and there are suggestions in the media that Woolworths did exactly the same thing during the Christmas period to fund its "Cheap Cheap" promotion.
Any tangible proof of those allegations or announcement of an investigation by the ACCC would lead to the possibility of hefty legal bills, fines and ultimately, lower profits.
Foolish takeaway
While share prices are impossible to predict in the short term, investors can make better decisions by being aware of the key events that have the potential to affect the stock of a company.
In 2015, Woolworths faces its fair share of challenges, and if one or more of the above were to happen, investors could expect serious consequences for their Woolworths shares.
