If you were caught off guard by the collapse in the Woolworths Limited (ASX: WOW) share price, you're not alone.
Most investors are aware of the risks associated with investing on the share market, but to mitigate those risks, they tend to focus on investing in big-name companies.
Those with solid track records and reliable earnings growth. The ones that have consistently grown their dividends and offer a product or service that is essential to our everyday lives.
Woolworths ticked all those boxes, and was thus a favourite amongst investors, big and small. So much so that there's a good chance it formed a very meaningful part of your own portfolio, or at least that of someone you know.
To be fair, the company has done investors a great deed over the last two decades, and no one would begrudge holding Woolworths' shares during that time.
But things began to unravel in May 2014, around the time the shares hit a fresh all-time high near $39 per share…
Since then, shareholders have watched on in disbelief, their shares stuck in a nosedive.
They're now fetching just $24.50 on the ASX, representing a loss of more than 37%. It's something you simply don't expect from a blue chip company – especially not one with a history like Woolworths.
Walking On Hot Coles
The company once enjoyed a stronghold over Australia's multi-billion grocery industry, but became overly focused on its profit margins and not enough on customer satisfaction.
Enter Coles…
Coles was acquired by Wesfarmers Ltd (ASX: WES) late in 2007 following years of underperformance.
The business was poorly managed and the head office bloated. It certainly didn't reflect its status as one of Australia's most iconic brands.
At the time, the Fairfax press even quoted one Merrill Lynch analyst as saying:
"We doubt whether Wesfarmers [or anyone else for that matter] has the capability to turn this business around."
Eight years later, and the roles have been reversed.
Under the management of Wesfarmers, Coles has revitalised its brand. In fact, it has outperformed Woolworths in each of the last 25 quarters, recording stronger like-for-like sales growth and a better overall customer experience.
Discount retail chains Aldi and Costco are also making a push into the industry, threatening to steal an even greater share of the market.
Woolworths is now being forced to cut prices to attract customers back to its stores. That's restricting profit margins and is already impacting earnings in a big way.
In fact, the group recently warned of a 35% decline in first-half earnings for FY16, and somehow, I think it could get even worse…
In addition to the woes of Woolworths' core supermarket division, there's also problems with both Big W and Masters, as well as the fact the company is still yet to find a replacement for the outgoing CEO Grant O'Brien.
Masters has thus far failed to live up to expectations, costing the retailer billions of dollars in the process. Sales have improved considerably, but the chain is still a long way off competing with the Wesfarmers-owned Bunnings.
Then there's Big W…
Like Masters, Big W is struggling to remain relevant while Wesfarmers' dual discount variety brands Kmart and Target appear to be tracking along nicely.
Indeed, there has even been talk that Big W could be on the hit list of various private equity firms, while rumour has it the entire Woolworths group could also be a sitting duck for cashed-up predators.
Returning back to retail investors however, many are now wondering whether the pullback in Woolworths' share price is a good opportunity to buy.
Knowing when to buy a company can be extremely tricky
Of course, the best time to buy is when the market is lacking confidence, or, as Warren Buffett would say, "Be fearful when others are greedy and greedy when others are fearful."
Clearly, investors don't want a bar of Woolworths right now.
But with the shares hovering near their lowest price in seven years, in theory, this could be an excellent time for investors to make their move, ignoring any near-term volatility and focusing on the long-term opportunity.
However, there is something even more important than buying when shares look 'cheap', and that is ensuring that the health of the underlying business is sound.
It is clear that is not the case with Woolworths right now…
Of course, there could well come a time where it makes sense to invest in the retailer.
When its balance sheet is in better shape…
When it finds a replacement chief executive…
When it becomes evident the company has regained its competitive advantage at the head of Australia's multi-billion dollar grocery industry…
When those things happen, Woolworths could even find itself becoming an official Motley Fool Share Advisor recommendation!
But for now, there simply remain far better opportunities.
Take, for example, the latest Motley Fool Share Advisor recommendation, which will hit members' inboxes at 4:30pm AEDT this afternoon!
Out of respect for our members, I can't give too many details away, but I can tell you that this company has a strong balance sheet. It enjoys strong operating cash flows and possesses plenty of growth potential.
In fact, the consensus forecast, as provided by Morningstar, is for a double-digit lift in earnings and dividends. It's also currently trading on a forecast 2% dividend yield, which is essentially the cherry on top of a potentially great investment.
To me at least, it looks a much better bet than Woolworths shares.
