Woolworths Limited (ASX: WOW) is Australia's largest retailer and the undisputed leader in Australian supermarkets (by sales). Since mid-2014, Woolworths shares have been in a downward spiral to trade near post-GFC lows as sales growth slows and concerns linger around its ability to retain market share. Comparatively, Wesfarmers Ltd (ASX: WES) owned Coles has grown from strength to strength, increasing sales and market share (arguably at Woolworths' expense), leaving many wondering whether Woolworths' problems are blown out of proportion.
The competitive landscape
Woolworths is undeniably Australia's largest supermarket, controlling approximately 37.3% of the food and liquor market in Australia, according to research by Roy Morgan. Nevertheless, Woolworths' stranglehold over the market appears to be waning with foreign entrants Aldi and Costco growing market share at increasing rates. Their foray into the Australian market has led to increased competitiveness between supermarkets, resulting in margin pressures and decreased profitability for all the majors.
Whilst one could excuse Woolworths for factors impacting an entire industry, the fact is that Metcash Limited's (ASX: MTS) IGA brand continues to retain market share, whilst Coles is growing at an accelerating pace. This makes Woolworths' inability to retain/win market share a cause for concern.
The problem child
Another reason for Woolworths' underperformance has been its problematic home improvement joint venture with American hardware giant Lowe's. The joint venture gave birth to Masters, which was slated to be Woolworths' answer to compete against (Wesfarmers owned) Bunnings' monopoly over the hardware sector.
Unfortunately, previous management bit off more than it could chew, with the business haemorrhaging cash and making loss-after-loss each quarter. The outcome was inevitable, with Woolworths' management finally pulling the plug on the failed venture in January this year and divesting its stake in Masters. The result was not pretty.
The bottom line
To put it politely, Woolworths presented a poor set of results for its first-half of 2016. Underlying net profit after tax was down a whopping 31.6% to $925.8 million, with its dividend cut 34% as a result. After accounting for the loss associated with its Masters exit, statutory net profit after tax was a loss of $972.7 million.
Importantly, sales growth in Woolworths' flagship food and liquor division slowed to 1.2% for the half, easily underperforming Coles' rampant growth of 6% in the same period.
Critically, management expects this slowing growth to continue, flagging "[no] significant improvement in comparable sales . . . in the second half". This did not exude optimism about Woolworths' future, causing further downward pressure on its share price.
Foolish takeaway
Although Woolworths' share price presents compelling value based on its long-term average growth rate, there is currently too much uncertainty for me to recommend buying more of the stock at current prices. Whilst it is indeed possible that Woolworths will grow sales (and profit) from here, rekindling its position as Australia's flagship supermarket, I will wait for some proof in its results before buying further.
