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Where does the Woolworths share price go from here?

Credit: James Arboghast

Woolworths Limited (ASX: WOW) is one of the worst blue chip performers of 2015, its shares falling nearly 25% compared to a 5% fall for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). But what does the future hold for the Woolworths share price?

Shareholders of Woolworths find themselves in a very unfortunate position in that there has been no single problem that has caused the company’s recent demise.

To begin with, Woolworths’ core supermarket business is facing fierce competition, with the strength of Australia’s supermarket duopoly now in serious doubt. For too long, management has focused on higher margins and ignored the need to please customers with lower prices and better service.

As a result, its supermarket same-store-sales growth has consistently hovered well below that achieved by primary rival Coles, owned by Wesfarmers Limited (ASX: WES), while Aldi, Costco, and possibly even Lidl threaten to steal all-important market share in Australia’s $90 billion grocery industry.

Indeed, management have been more than open about their mistakes in running the business with CEO Grant O’Brien even announcing his resignation from the company in June this year. Woolworths is yet to find a replacement for O’Brien, leaving the door open to plenty of uncertainty.

At the same time, Woolworths must decide what to do with the disastrous rollout of Masters, which has failed to compete with Bunnings, also owned by Wesfarmers, as well as the struggling Big W business.

At this point it is unclear whether they will continue pumping money into the business lines in the hope of a turnaround, or whether they could consider offloading them to private equity, just as they did with Dick Smith in recent years.

Where to from here?

Despite the enormous sell-off over the last 12 months, Woolworths’ recent update on first-quarter earnings made it clear that the tough times are by no means over.

Like-for-like sales for the supermarket division fell 1% during the quarter and management even told investors to expect a 28% to 35% drop in half-year profit, compared to the first half of last year. Some analysts also expect the fully franked dividend yield to fall by a similar figure.

Although I think Woolworths will regain some strength in the long run, there are signs that suggest there could be more pain in the near-term – especially if the dividend is cut or if management issues any further profit downgrades. It’s a company that investors should definitely keep their eye on, but for now, it might be best suited for your watchlist rather than your portfolio.

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Costco Wholesale. Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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