Woolworths Limited returns to growth, are its shares a buy?

Credit: Woolworths

Woolworths Limited (ASX: WOW) has released its first-quarter sales results today, reporting the first lift in comparable sales growth at its supermarkets in more than 12 months.

The shares rallied higher as a result, lifting as much as 3.8% to a high of $25.75, although they have since drifted back to around $25. Even still, that compares to a price tag of just $20.30 per share early in July, marking a gain of more than 23% during that time.

The retail and groceries giant said sales in its Australian Food division increased by a total of 1.7% to $9.3 billion during the first quarter of financial year 2017 (1Q17), compared to the same period last year.

Although average prices throughout the stores declined by 1.9% (or 2.8% excluding tobacco) as part of Woolworths’ bid to become more competitive, it still managed to record same store sales (SSS) growth of 0.7%. It added more than 600 items to the ‘Price Dropped’ and ‘Always’ programs since the end of the financial year, with 2,230 items now participating in those programs.

Woolworths’ shareholders will no doubt be pleased with the result, particularly given that it follows a rather lacklustre first-quarter result from its rival Wesfarmers Ltd (ASX: WES) on Wednesday. The results showed a growth rate of 1.7% in SSS for its Coles supermarket business, down from 2.9% during the three months immediately prior and from 4.9% in the three months before that.

Source: Wesfarmers report

Source: Wesfarmers report

Notably, Woolworths’ own SSS are still lagging behind that of Coles, but it seems it could be catching up. Woolworths’ CEO Brad Banducci said:

“Customers continue to respond to the improvements we are making, with Australian Food delivering its first positive comparable sales growth since Q2’15, despite ongoing material price deflation. While we are pleased with our progress, there remains much more to do. Our trading performance over the key Christmas trading period is crucial to the financial performance of the Woolworths Group in FY17.”

Other Results

Of course, there is more to Woolworths than just its supermarket division. Elsewhere, petrol sales for the quarter were 11% below the prior year due to a reduction of almost 14% in average fuel prices. Its New Zealand Food division struggled with comparable sales down 0.7% on the prior year (although favourable currency movements saw total sales from the division increase 8.1% in Australian dollar terms), while its Big W business also continued to lag.

Indeed, comparable sales for the Big W business retreated another 5.7% with deflation of 3.7% for the period (following deflation of 6.2% in the fourth quarter of FY16). The company said: “Whilst it is still early in our multi-year turnaround we have made solid progress in driving our strategic plan. This includes launching our own online site in the quarter, clearing excess inventory and reducing the complexity of our offer.”

Woolworths no longer reports sales from its Home Improvement business, while its Hotels recorded comparable sales growth of 2.1% during the period.

Foolish takeaway

It is still early days in Woolworths’ turnaround plan, and a lot could still go wrong. Indeed, the company is still competing for market share with the likes of Coles and Metcash Limited’s (ASX: MTS) IGA stores, while Costco and particularly Aldi still represent viable threats. While there are certainly some encouraging signs, risk-averse investors may want to focus on some of the market’s other blue-chip shares, rather than Woolworths at this early stage.

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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. 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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