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Woolworths Limited 1Q sales grow at only 3%: Should you sell?

Today, Mr Market has sent shares in supermarket giant Woolworths Limited (ASX: WOW) sharply lower, down 4.5% at the time of writing, on the back of its first quarter sales result.

For the 14 weeks ended 5 October 2014, Woolies, a $45 billion company with a dominant market share of groceries and liquor in Australia, achieved $16.2 billion in sales. When compared to the prior corresponding period in FY14, it represents 3.0% growth in the top line.

Sales from Australian Food, Liquor and petrol were up 2.6% combined, New Zealand Supermarkets (in AUD) were up 5.6%, General Merchandise was down 0.4%, Hotel sales were down 1% and Home Improvement – which includes Masters and Home Timber and Hardware – was up 20.7%.

This compares with key rival Wesfarmers Ltd (ASX: WES) – owner of Coles supermarkets and more – which last week achieved a 5.8% jump in Coles food and liquor sales, an 11% increase from Bunnings Warehouse, an 8% jump from Officeworks and a 2.9% increase from Kmart. Despite a 4.6% fall in Target sales, Wesfarmers shares popped 1.3% on the day of its results.

So why are Woolworths shares being hit so hard?

This is a fair question for any investor to ask but the simple answer is, presumably, that Mr Market was expecting a better result. Especially after all the fuss made over Wesfarmers’ results last week, some may see today’s ‘weak’ results as a sign that Woolworths may come off second best from the ongoing price war.

Didn’t investors already know the market is competitive?

3% growth from a big supermarket with an established market share is a good result. However, it appears good wasn’t good enough for Mr Market. Especially, when we consider the company’s valuation.

I’ve been saying it for a while but investors need to realise Woolies isn’t the growth stock it once was. Indeed I find it hard to believe it’ll beat the market from its current price.

So it is time to sell your shares?

Absolutely not. Woolies continues to be one of the best defensive businesses on the market. Although it is facing increased competition from Wesfarmers, as well as foreign giants such as Aldi and Costco. Furthermore, its Masters home improvement chain isn’t ticking along quite as fast as shareholders would like. However, it pays a good dividend and is unlikely to go belly-up in even the worst market crashes.

What of the outlook?

Despite a slow first quarter, sales are expected to regain traction in coming months. Woolies CEO, Grant O’Brien said: “While first quarter sales were lower than expected, we are confident that our trading plans will improve momentum in the second quarter which includes the key Christmas period.”

Remember, investing is a marathon, not a sprint. And unless you believe today’s slightly lower-than-expected results significantly and structurally change your investment case for Woolies, there should be no reason to panic.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.  

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