Why Woolworths shares are up 16% for the year

Shares of Aussie retailing giant Woolworths (ASX: WOW) are up nearly 16% since this time last year, while the ASX 200 (^AXJO, ASX: XJO) has returned just over 5%% in the same period. That handsome outperformance of the index represents a nice gain for Woolworths’ 450,000 shareholders. But what’s going on? And most importantly, can Woolies’ upward trend continue?

A solid first quarter and a spinoff for shareholders

According to the company’s first quarter 2013 report, Woolworths’ sales rose 4.6% over first quarter 2011 to $10.1 billion. The company’s core business in Australian Food and Liquor grew 4.6%, to 10.1 billion. Other bright spots included a 17.3% increase in hotel sales and a modest increase in New Zealand supermarket sales. The company’s home improvement stores fared even better, with seven new stores opening and sales increasing 62%.

This comes after a solid 2012 report from the company – given the challenging retail conditions — in which Woolworths’ overall sales rose about 5% but after-tax earnings were hurt by provisioning for discontinuing operations of the company’s consumer electronics business in Australia, New Zealand and India.

These first quarter results also fall in line with what Woolworths’ management had named as growth strategies and priorities for 2013, including extending the company’s leadership in food and liquor, and acting on the company’s portfolio to maximize shareholder value. That last strategy takes the form of spinning off SCA, a property group set to own about 70 shopping centres. On November 30, existing Woolies shareholders will receive one share of the property group for every five shares of Woolies that they own.

Growth prospects: could Woolies go the way of Walmart?

As Warren Buffett once said, “Economic progressions, as they grow larger, forge their own mathematical anchors.” That is, sometimes companies are too large to grow much more, as may be the case with Woolworths.

But what if Woolworths were to expand beyond Australian shores and its home base? It’s a trajectory well known to U.S. retailing giants, namely Walmart. For years, the bulk of Walmart’s revenue growth has come from new stores in foreign countries outside the retailer’s U.S. origins. Since the year 2000, for instance, Walmart’s United States revenues have increased over 140%, but international revenues are up over 450% over the same period. Of course, it hasn’t all been smooth sailing. (Early this year, a bribery scandal in the company’s Mexican operations invited an investigation by the U.S. Department of Justice and Securities Exchange Commission.)

Such a move into overseas markets – if well executed — could possibly mean years of Woolworths outperforming the ASX 200. However, the notion of Woolworths’ massive overseas expansion is for now just a castle in the sky.

The takeaway? Just now you wouldn’t call Woolworths a hot growth stock, and investors looking for greater potential may want to check out retailers like David Jones (ASX: DJS), with its (generally!) higher-margin department store business, or Wesfarmers (ASX: WES), with its diverse set of segments that range from retail to resources and insurance.

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Motley Fool writer/analyst Catherine Baab-Muguira  doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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