Is Woolworths a buy?

Leading retailer Woolworths (ASX: WOW) held its Annual General Meeting (AGM) yesterday. As Motley Fool analyst Mike King wrote here, management was forced to defend its move into the hardware sector, given the losses the Masters Home Improvement business has endured.

Woolworths has already spent around $1.5 billion taking on the Wesfarmers (ASX: WES) owned Bunnings chain, by rolling-out the Masters’ retail footprint. Having also endured significant start-up losses, which won’t end until 2016 – when management expects to achieve a break-even result – some shareholders are understandably concerned.

Given the structural shift towards online sales, the significant investment in ‘bricks-and-mortar’ is all the more concerning. As Chief Executive Officer Grant O’Brien noted, Woolworths is “unquestionably the largest Australian and New Zealand online retailer with 42% growth in online sales from continuing operations for the year.” The strong growth in online, has put Woolworths on track to achieve more than $1 billion of online sales in the current financial year. Woolworths isn’t alone in experiencing fast growth rates in their online divisions and all investors are right to question any retailer that continues to spend shareholders’ money on further investment in physical assets.

The Potential

What the future holds for Masters is hard to know, but what is certain is that shareholders require a decent return on invested capital. Given that Bunnings has only around a 16% share of the hardware market, there is certainly the opportunity for Masters to win market share. Likewise, given Woolworths’ experience in retailing, the business will likely trade profitably at some point in the future.

Being sceptical and cautious as an investor can be a good thing and for this reason watching from the side lines and judging the success of the Masters strategy – with reference to returns on capital – could make sense.

Foolish takeaway

While Woolworths’ share price has underperformed both Wesfarmers and the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) in the past 12 months, the stock still trades on a full looking 17.7 times price-to-earnings. While a well-executed Masters’ strategy could certainly provide upside and earnings growth, there is also risks to the downside, which would make overpaying for Woolworths unadvisable.

Looking to improve your retirement! Interested in our #1 dividend-paying stock? Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…


The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!