The share price of Woolworths Limited (ASX: WOW) jumped a further 1.1% on Friday to finish the week up 5.9%; the blue-chip stock is now up 6.3% in the past month. In comparison, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) rallied 3.3% this week but has gained just 1.4% for the month.
The near term market-beating performance by Australia's largest retailer doesn't make up for the 20.8% loss shareholders are still wearing over the past year however it does beg the question –
Has Woolworths bottomed?
It's a question which no doubt many long-term investors are asking themselves as they eye the opportunity to acquire this blue-chip stock at a multi-year low. The temptation is understandable, however, there are still plenty of reasons to be cautious and tentative about buying this stock, despite its blue-chip status.
Weakened industry position: Coles, under Wesfarmers Ltd (ASX: WES) ownership, has done a superb job of reinventing itself and regaining lost market share. This resurgence in the Coles business means the "easy" days are over for Woolworths.
Competition intensifying: Competition isn't just coming from a resurgent Coles but also from global entrants such as Costco and Aldi which have structurally changed the dynamics of the Australian supermarket industry. To date, the Australian supermarket industry has enjoyed world-leading profit margins – these margins have enticed competitors and will more than likely lead to a contraction of margins more in line with global norms.
Better off without Masters: Most analysts appear negative on the potential for Woolworths' home improvement business Masters to successfully compete with the Wesfarmers' owned Bunnings. Arguably the group would be better off biting the bullet, closing down Masters and focussing on what they are already good at.
Valuation: With the stock trading at approximately 14x forecast earnings arguably the stock isn't cheap considering the large, mature nature of the business, the competitive pressures faced by the group and the corresponding downside leverage a low margin business has to lower revenues.
