Woolworths Limited (ASX: WOW) came crashing down hard on Friday last week after the supermarket behemoth released its interim earnings results. The results were far from great and investors punished the stock accordingly, selling it down more than 9.5% and wiping more than $4 billion from its market value.
Here's a brief overview of what went wrong for Woolworths during the first half:
- Net profit after tax (NPAT) down 3.1% to $1.28 billion
- Revenues up 1.9% to $32.68 billion
- Earnings per share (EPS) down 3.9% to 102 cents
- Masters sales up 28.5%; loss of $103.2 million
- $103.7 million provision for the transformation costs of its Big W business
First and foremost, investors are becoming increasingly concerned about how much money is being pumped into the Masters Home Improvement chain. Although sales grew strongly over the period, the loss widened to $103.2 million, which compares to the $64.4 million loss recorded in the prior corresponding period. The business has now accumulated more than $500 million in losses and Woolworths continues to push back the timeframe in which it says it will break-even on the investment.
However, it was Woolworths' guidance for the second half which really got under investors' skin. While it had reconfirmed full-year earnings growth of 4-7% as recently as November, it's now advising for growth to be "towards the lower end" of analyst forecasts that range between 1.8% and 6.6%.
The reason for this is largely due to a heavy investment the company will make in its core Australian supermarkets, following a strategic review on the division. While the investment will impact near term earnings, it will also help Woolworths improve long-term performance and drive future growth. More details will be provided regarding this initiative in May.
Should you buy Woolworths?
Based on the market's reaction on Friday, it's clear that many investors believe Woolworths' first-half results reflect poorly on the company's future. However, what Woolworths is actually doing is prioritising long-term shareholder returns over near-term results, which is exactly what long term Foolish investors should be excited for.
Indeed, plenty of investors would still argue that Wesfarmers Ltd (ASX: WES) is the better investment, given its stronger performance of late (particularly from its Coles and Bunnings businesses). However, at today's price of $30.71 per share, Woolworths looks like an excellent prospect for investors willing to remain patient.
To make for an even stronger case, Woolworths still increased its shareholder distributions during the half, declaring a fully franked 67 cent dividend, up from 65 cents in the year-ago period. The stock is estimated to yield 4.7% fully franked this financial year, putting it on a grossed up yield of 6.7%. With that in mind, Woolworths appears to be an excellent buy right now.
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