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How Woolworths Limited supermarket sales just shot the lights out

Former market darling Woolworths Limited (ASX: WOW) might be back in favour with investors over the course of 2017 after reporting same-store sales growth up 4.5% on an Easter adjusted basis for the quarter ending March 31 2017.

The share price has raced out of the blocks this morning in response to the news to hit a 52-week high of $27.60, as the retailer appears to be delivering on its turnaround strategy.

For the quarter total sales were up 5.1% to $9.3 billion and the supermarket same-store sales growth is now heavily outpacing rival Coles operated by ASX-listed Wesfarmers Ltd (ASX: WES).

Over the quarter average prices in the food business declined by 2.5%, which suggests the group is winning market share with comparable transaction growth up 4.1% on an adjusted basis.

Online sales also lifted by 20% over the quarter in an encouraging result, although the entire supermarket sector could come under pressure if U.S. giant Amazon does set up shop in Australia.

The group’s Big W discount department store business continues to struggle badly, with sales down 8.6% to $757 million and the group’s CEO conceding that its “turnaround will be a multi-year journey”.

Outlook

While the strong same-store sales growth is a big positive, I think investors should consider how much of this is being driven by price cutting winning back customers, but slashing the critical profit margins.

The bottom line is what counts and whether the stock represents good value at $27.60 is hard to know until the company reveals how much of the sales growth is being driven by the surrender of margins and increased capital or operating expenditures.

For that reason I’m inclined to stay on the sidelines until the group reports its full year result in August, as it is still facing rising competitive pressures and looks no bargain at current valuations.

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Wesfarmers Limited. Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

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.

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