Woolworths Limited shares soar 4.4% – Is this a "buy" signal?

On Monday the share price of retailer Woolworths Limited (ASX:WOW) soared 4.4%.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The share price of Australia's largest retailer Woolworths Limited (ASX: WOW) closed 4.4% higher on Monday at $23.64.

It was a great performance, particularly in light of the continued sell off in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), which followed overseas leads to close down 0.7%.

The reason for the rally was an update from the company regarding its Home Improvement Joint Venture (JV) with US giant Lowe's.

The JV covers both the Masters Home Improvement and the Home Timber & Hardware businesses and has been a serious source of angst for many shareholders ever since it was first formed.

The update – which announced that Woolworths would look to exit the hardware sector all together – will not come as a surprise to a number of close followers of the company. Indeed, many shareholders may be cheering the decision.

In order to undertake a sale or wind-up of the Masters and Home improvement businesses, Woolworths must first buy out its 33.3% JV partner Lowe's as per the terms of their original agreement.

Management has provided guidance that it will take at least two months for the JV buy out to occur and then it will take additional time to undertake the sale or wind-up process.

How will this impact value?

With Woolworths' board making a clear cut decision to exit its foray into the hardware sector, its peer Wesfarmers Ltd (ASX: WES) which owns the hugely successful Bunnings hardware business will no doubt be ecstatic that it has managed to see off such a deep-pocketed competitor.

The question for investors now is what this strategic decision to exit the hardware category means for the future outlook of Woolworths.

On the one hand it closes the door on what could have been a very big growth opportunity for the group. It also throws into doubt the potential success of any future growth initiatives the group may consider undertaking outside of the company's immediate core competencies.

On the other hand, with the Home Improvement division losing $225 million in earnings before interest and tax in financial year (FY) 2015 alone, the immediate benefits to the bottom line are obvious.

Indeed, it's likely that the market views the simple act of closing down the business as a value-enhancing decision.

With the reduction in losses from the Home Improvement division arguably improving the overall valuation that the market will place on Woolworths, the stock could arguably have just become more appealing to long term, buy-and-hold investors.

That being said, it's worth remembering that arguably the single largest problem facing Woolworths is not its Home Improvement division but rather the competition its supermarket division is facing from not just Coles but Aldi and other potential new entrants as well.

Motley Fool contributor Tim McArthur 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. 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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »