3 reasons for hope for Woolworths Limited shareholders

Credit: James Arboghast

The Woolworths Limited (ASX: WOW) share price has dropped 2.5% in lunchtime trading after the group reported disappointing quarterly sales results.

Total sales for the Australian Food and liquor business in the March quarter inched up just 0.4%, while same store sales slipped 0.9%, a consistent level over the past 12 months.

But there are several reasons for existing shareholders to hang on…

  1. It’s clear that Woolworths needed to lower its margins, and cut the prices of a large number of products across its Australian supermarkets to remain competitive.Several surveys had shown that a basket of products from Woolworths was higher than a basket of equivalent items from rival Coles – owned by Wesfarmers Ltd (ASX: WES), as well as the Metcash Limited (ASX: MTS) supplied IGA stores, and much higher than Aldi.

    That means revenues and same store sales growth will be lower as Woolworths cuts prices and reinvests hundreds of millions back into discounting prices. The more Woolworths cuts prices, the lower its margins will be, but it also makes the retailer more competitive, which should entice customers back into its stores.

  2. The Home Improvement division is still generating sales and sales growth, but the end of that fateful chapter is getting closer. There are reportedly a number of bidders for Masters stores and the Home Timber and Hardware wholesale business, which is good news and means Woolworths will at least get some return, albeit small on the billions it invested into Masters.Once Masters is gone, it will also no longer be a drag on earnings. In 2015, the Home Improvement business gouged a $225 million hole in earnings before interest and tax (EBIT) – almost negating the Hotels division’s $235 million in EBIT.
  3. Several studies have shown that investors who have patiently held onto shares over the long-term despite all the ups and downs tend to outperform the market. Quality companies like Woolworths will come good and it may take some time, but patient investors who hold onto their shares, rather than trying to exit at a good price and buy back in at a cheaper price will more than likely have better returns

Foolish takeaway

The last reason is why I’m continuing to hold onto my Woolworths shares – and why I’ll probably still own the same lot of shares in 10-20 years time.

Forget BHP and Woolworths.

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Motley Fool writer/analyst Mike King owns shares in Woolworths and Wesfarmers. You can follow Mike on Twitter @TMFKinga

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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