What should investors do with Woolworths Limited (ASX: WOW)?
It's a topic that has been cause for plenty of debate over the last 12 months or so, over which time the shares have lost almost 31% of their market value. In fact, they hit a low of just $25.06 on Friday last week – a price not seen since early 2012 – and went dangerously close to falling below that level again today.
Woolworths' woes have been well documented. Indeed, the company has lost a considerable amount of market share in its key food & liquor division to competitors Coles – owned by Wesfarmers Ltd (ASX: WES) – and Aldi, while it is also bleeding chips thanks to its Masters Home Improvement chain and its Big W brand.
Some analysts have suggested that Woolworths' best option going forward is to simplify its business. That could involve the sale of its Big W and Masters businesses – deeming the massive investments made in recent years completely useless – whilst also divesting its joint venture with Caltex Australia Limited (ASX: CTX).
This approach could help free up some cash while it would also allow management to focus almost solely on winning back market share in its supermarkets. Considering how important the supermarket division is to Woolworths' earnings, winning back market share is a must for the longevity of the company.
Although selling divisions seems like every analysts' solution to the problem, I don't believe that to be the case. Sure, Masters has acted as a huge drag on earnings since the joint venture was entered into, but over the long term there is still the chance of success. Indeed, the company is in the process of converting each of its stores into a new format which has average sales more than 30% better than the old structure. As more and more stores are converted, this could have a beneficial effect in the long run.
Meanwhile, I also believe a new management team could be what it takes to turn the company's fortunes around. Earlier in the year, Grant O'Brien, the group's current CEO, announced his resignation from the group on the back of yet another earnings downgrade. He's still in charge of the business until Woolworths can find a suitable replacement, but the newly appointed chairman, Gordon Cairns, said the search for new leadership is progressing well.
Over the coming periods, Woolworths will devote hundreds of millions of dollars to removing costs from the business whilst also improving operating efficiencies. These savings will then be reinvested into the business to reduce prices and improve the customers' in-store experience in a bid to win customers back from its rival stores.
Unfortunately for investors with a one or two-year focus, this will mean lower operating margins – the company has said so itself. It could also result in a decline in earnings this financial year, and maybe next, while the dividend payments could also stagnate at $1.39 per share.
What this means for you
The immediate future isn't looking so bright for investors, and this could result in the shares losing more ground over the coming weeks and months. But that could also be an opportunity for long-term investors to buy.
As highlighted above, Woolworths' shares are now hovering at a three-year low price and offer a generous 5.3%, fully franked dividend yield. As you'll note from my disclosure below, I do not own shares in Woolworths right now, but the company is certainly on my watch list and could become part of my portfolio should the price fall much further.
