Woolworths: Third quarter sales soft

Price wars with competitor Coles continue to take their toll

a woman

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What: Woolworths Limited (ASX: WOW) today released its third quarter sales results – the three months to the end of March 2012. Total Group sales hit $14.1 billion, an increase of 3.9 per cent over the previous corresponding period.

Most divisions posted positive growth, except for consumer electronics which was fairly flat falling by just 0.3 per cent. Woolworths has already announced plans to offload the Dick Smith business, but nothing concrete has been announced yet.

'Like for like' sales for the third quarter (which exclude new store openings and store closures) in the company's food and liquor division were flat, compared to 3.3 per cent growth in 2011. Contributing to the flat growth, Woolworths is still experiencing significant price deflation, with average prices falling 4.4 per cent, the majority of which is due to an ongoing price war with Coles, owned by Wesfarmers Limited (ASX: WES). Metcash Limited (ASX: MTS) also previously reported being impacted by the ongoing price war.

Woolworths continued opening new stores during the quarter, with 28 new stores, including 8 liquor stores and 6 new Australian supermarkets, although it also closed 3 supermarkets and 7 liquor stores, for a net new store total of 17. It shows that Woolworths still has confidence in its businesses and their profitability in years to come.

Probably the most pleasing aspect of the announcement was that Home Improvement sales for the third quarter increased by 29.4 per cent to $211m. The result includes sales from the first 10 Masters stores, with three opening during the quarter.

So What: All up, a very good result, considering the ongoing price war with Coles, tight consumer market and unseasonably cold and wet weather, with NSW experiencing its wettest March in more than 50 years. Price deflation is still a major issue, but will likely disappear when "normal" trading resumes. It's anyone's guess when that will be, though.

Now What: Woolworths' share price has fallen by 3.4 per cent compared to 12 months ago, reflecting the tough retailing conditions and the price deflation the market is experiencing. Despite the tough conditions, Woolworths is still expected to make more than $2 billion in profit for the financial year to June 2012.

You don't often get a chance to buy a top quality business like Woolworths cheaply. If you want a stock to chuck into the bottom drawer and forget about for the next 10 years, while receiving a 5 per cent fully franked dividend, Woolworths may be the stock for you.

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Motley Fool contributor Mike King owns shares in Woolworths. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.

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