Supermarket giant Woolworths Limited (ASX: WOW) this morning downgraded its full year profit guidance 'before significant items' to be flat on the prior year at around $2.45 billion.
After including what the business terms 'significant items' the group is forecasting a decline in profit to around $2.15 billion and the 'significant items' are mainly around transformation and restructuring costs that arguably should be accounted for as part of the normal course of business.
The group's chief Grant O'Brien has also resigned amidst the fallout from a shocking sales decline that is in part due to management's failure to react to the competitive threat from low-cost German rival Aldi.
The company also announced today that comparable Food and Liquor sales for the fourth quarter to date had declined 0.7% from the prior corresponding quarter. Declining comparable sales for a business like Woolworths should not be taken lightly and the admission that May and June to date had been especially weak should set alarm bells ringing for investors.
Those investors need to consider whether declining sales are a reversible short-term blip, or symptomatic of a structural shift taking place as a third force (Aldi) arrives in the Australian supermarket sector.
The Australian food and grocery supermarket sector was probably the least competitive in the Western world until the arrival of Aldi and it's worth noting Aldi has won big market share by decimating the margins of rivals in far more competitive markets across Europe.
Another potential long-term threat for Woolworths' world-leading profit margins is the fact that another low-cost German operator in Lidl will likely start trading in Australia sometime soon.
Notably the Coles supermarkets operated by Wesfarmers Ltd (ASX: WES) continue to post respectable same store sales growth likely as they are more price competitive. Although in my opinion they also may start to feel the heat over a long-term basis.
Of course it is possible that Woolworths will be able to execute a turnaround strategy via planned cost cutting that will allow it to reduce prices while maintaining margins. The strategy will take some time to execute however and will need to be radical to have the desired effect.
The business also faces problems over its loss making Masters Home Improvement business, while the resignation of CEO Grant O'Brien adds to the evidence of trouble at the top brought about by questionable management strategies.
In my opinion Woolworths looks to be facing some long-term headwinds and its attractive dividend yield will be little compensation if the share price starts to track earnings lower, although others may see value in it if able to execute its turnaround strategy…
If you're looking for a high income and the chance of capital growth why not consider a business with a strong outlook and an attractive valuation?
