Woolworths Limited shares are sinking: Is it time to buy?

Shares in the retailer are down 10% in November, and more than 2% today

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Supermarket giant Woolworths Limited (ASX: WOW) has seen its share price fall 2.7% today, to $32.12 currently, and 7.6% over the past month.

In fact, shares in the retailing giant hit a 52-week low of $32.07, and a fair way of the high of $38.92 reached in April this year.

So why are Woolies shares sinking?

There are a number of factors that are likely to be causing the supermarket retailer's shares to fall…

  1. Earlier this month, Woolworths unveiled first quarter sales growth of 3.9% for its Australian Food and Liquor division, while major rival Coles, owned by Wesfarmers Ltd (ASX: WES), saw a 5.8% jump in food and liquor sales. Same store sales growth of 2.1% compared to the previous year, was less than half of what Coles achieved in the same period.

    Coles has consistently beaten Woolies for quarterly sales growth in recent years, and it appears investors were hoping that Woolies were finally catching up.

  2. Wesfarmers hardware division Bunnings also posted strong growth of 11%. In comparison, Woolworths' Masters, Home Timber and Hardware are still in their infancy, and appear to be struggling to compete with Bunnings. While still growing sales at 21% over the previous quarter, Masters in particular has plenty of work to do to catch up to Bunnings.
  3. There are concerns, which we highlighted here, that Australian supermarkets may be facing similar threats from the rise of discount retailers like Aldi and Costco, which UK retailers have faced from super cheap German supermarkets Aldi and Lidl.
  4. Brokers have slashed their recommendations, with UBS citing the above issues and noting that supermarket margins in Australia are the highest in the world. High margins will inevitably lead to increased competition, but share prices will suffer says the broker, as it cut Woolworths to a 'Sell' from a 'Buy'.
  5. The big retailers are facing increasing scrutiny from the Australian Competition and Consumer Commission (ACCC) over their treatment of suppliers and potentially anti-competitive behaviour with smaller supermarkets.

But many of these risks are overblown in my opinion.

For a retailer with $12.8 billion in food, liquor and petrol sales in a quarter, which is 39% higher than Coles, growing at around 3% a quarter is still impressive.

Masters has just 49 stores compared to Bunnings 223 and is relatively young. Management have yet to hit on the winning formula for hardware, but they are savvy retailers and it should happen soon.

Competition from Aldi and Costco, not to mention IGA – supported by Metcash Limited (ASX: MTS), has been around for years, and has struggled to make a dent in the two majors' combined market share.

Woolworths is still a quality stock paying a decent 4.3% fully franked dividend.

At times of maximum pessimism, investors can pick up quality stocks on the cheap – it appears that time may have come for Woolworths – and one reason why I topped up my holdings recently.

Motley Fool writer/analyst Mike King owns shares in Woolworths. You can follow Mike on Twitter @TMFKinga

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