Shares of Woolworths Limited (ASX: WOW) were hammered this morning after the retail behemoth provided an update on its third-quarter sales and revealed its strategy moving forward. The stock fell by 4.2% earlier in the session, dropping to a low of $28.40.
Sales Update
With the retailer also set to provide a strategic update today, investors had been hoping for an improvement in sales to show that conditions aren't as bad as previously thought. Unfortunately, they were disappointed with the group reporting a 1.6% decline in overall sales (or 2.1% when adjusted for the timing of Easter) to $14.96 billion.
Unlike in periods gone by, it was Woolworths' petrol division which acted as the primary drag on overall group sales. Woolworths blamed changes to its alliance with Caltex Australia Limited (ASX: CTX) and sliding oil prices for the downturn, with overall petrol sales falling by 35.2%. That included a 20.8% decline in the volume of petrol sold during the period.
When the impact of the petrol division was excluded, overall group sales rose by 3%.
Meanwhile, investors are likely also responding to the lacklustre growth in sales from its Australian Food and Liquor division. Sales grew by 2.3% in the quarter, which compares to a more robust 5.4% growth recorded by its primary rival Coles, owned by Wesfarmers Ltd (ASX: WES). The retailer's lagging growth in this division is one of the primary reasons behind the stock's recent sell-off and has even sparked the need for a strategic review on the business (more on that below).
Finally, sales from its Masters Home Improvement chain rose 21.2%. Woolworths said that it has opened two stores under a new revised format which has thus far yielded positive results, while it plans to have 13 stores (approximately 22% of the network) in the new format by the end of the financial year.
Strategic Update
Although the quarterly sales weren't up to scratch, investors can take solace from the strategic review provided by management.
The retailer outlined its three-year growth strategy, which it is basing on a new 'Lean Retail' operating model. Woolworths believes this model will deliver more than $500 million of cost reductions across the 2015 and 2016 financial years, which it can then pass on to customers through lower prices, improved service and better convenience, thus strengthening its dominance in the market. In addition, 80+ stores per annum are slated for refurbishment in the medium term, which should enhance the customer experience.
Woolworths said: "We will turbo-charge our 'Lean Retail' model by investing more than $500 million into delivering lower prices, better service, and more attractive offers."
Of course, the issues facing Woolworths will be no quick fix with momentum, a reset of the BIG W business and progress towards profitability from Masters being flagged as three of the biggest challenges. While Woolworths is not a stock suited to short-term traders, 'Foolish' investors could certainly view today's update as a step in the right direction and look to begin building a position at the discounted share price.
