One year ago investors were able to buy shares in two of Australia's leading retail companies, Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) at around $36 and $44 respectively.
Today, those same shares are trading at roughly $28 and $42 respectively. The share price performance of Woolworths and Wesfarmers represents declines of 23% and 5% respectively and compares with a gain of nearly 1% in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
While dividends do reduce the underperformance versus the index, it has obviously not been a great 12-month period to be a shareholder in either company!
As we approach the August reporting season, investors will soon get the opportunity to review the full-year results for both retailers.
In the case of Woolworths, all eyes will be on the cash drain occurring at the Masters Home Improvement division and also on the effect increased competition is having on the group's world class supermarket margins. For the financial year (FY) ending June 2014, Woolworths reported earnings per share (EPS) of 195.6 cents per share (cps) and paid fully franked (FF) dividends totalling 137 cps. For FY 2015, according to consensus data provided by Morningstar, the group will report 194.4 cps and pay out FF dividends totalling 139 cps.
Meanwhile, investors will be looking for commentary from Wesfarmers' management about how it plans to grow the business post the sale of some key business assets including the insurance broking division. In FY 2014 the group reported EPS of 196.2 cps and paid FF dividends of 200 cps. In FY 2015 EPS of 215.1 cps and FF dividends of 200 cps are being forecast.
Based on current share prices and forecast earnings, Woolworths is trading on a price-to-earnings (PE) ratio of 14.3x while Wesfarmers is trading on a PE of 19.4x. In my opinion, Wesfarmers looks pretty much fully valued at these levels. In contrast, although the pricing of Woolworths appears undemanding, it may not be cheap enough yet considering the headwinds.
