Are Woolworths Limited (ASX: WOW) shares an attractive investment proposition?

Reviewing investing legend Warren Buffett’s experience with UK supermarket operator Tesco could offer some clues…

Here’s a brief history of Buffett’s experience of investing in the once mighty Tesco business.

  • In 2007 as Tesco’s market share soared to 31% Buffett acquired shares
  • In 2011 signs that Tesco’s strategy was beginning to come unstuck emerged with the company exiting Japan and then the US the following year. Buffett bought more shares
  • In 2013 Tesco revealed its first annual profit drop in 20 years
  • In 2014 Tesco’s shares slumped after details of an accounting scandal emerge. Buffett described his decision to buy Tesco shares as “a huge mistake”. Buffett started selling his Tesco shares at a huge loss
  • In 2015 Tesco announced the closure of stores and massively cut its product range as part of its turnaround plans

Will history rhyme?

While Woolworths’ shareholders will be hoping for a different experience to the one Buffett endured with Tesco, Buffett’s Tesco experience would no doubt shape his view on the attractiveness of the current opportunity which Woolworths presents.

On this score its worth remembering that Buffett likes to buy businesses with “franchise value” that he is highly confident will continue to grow for a long, long time.

It’s this confidence in a strong franchise which would likely be lacking for Buffett as it appears likely that the retailer’s market position has been structurally challenged by the entrance of Aldi and other strategic decisions the group has made.

This challenge to its franchise value is also being reflected in the downgrades which have occurred to analyst consensus estimates over the past year which show both sales and earnings per share being revised down (source: Reuters).

Woolworths’ problems don’t appear to be the type for which there is a quick fix, rather much like at Tesco, it could be a number of years before management turns the ship around.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.