The Woolworths Limited (ASX: WOW) share price dropped immediately after its report, but it has since recovered most of that fall. So, who was right, the optimists or pessimists?
Brad Banducci was hired to turn things around for Woolworths after it had fallen behind Wesfarmers Ltd's (ASX: WES) Coles and Aldi in terms of sales growth.
He worked hard to get rid of the 'cheap cheap' campaign and actually implement some genuine improvements to Woolworths, including 'investing' in prices.
Clearly the new message is getting through. In its report the Australian food segment revealed sales growth of 4.9%, earnings before interest, tax, depreciation and amortisation (EBITDA) growth of 10.3% and earnings before interest and tax (EBIT) growth of 11.11%.
Lowering prices whilst focusing on customer service seems to be a winning combination because it gives the customer two great reasons to go to Woolworths, beyond just being the closest supermarket for convenience.
Indeed, Woolworths pointed to the record customer satisfaction levels with overall customer satisfaction reaching 82%.
Online retailing could be a big disruptor to Woolworths at some point in the future, so it's good to see that Woolworths grew online sales by 28% in the half and 'pick up' is now being operated in over 1,000 locations with increasing positive reaction.
Woolworths is driving sales higher with both comparable transaction growth and comparable items per basket also growing. This is important because price deflation is good for customers but a negative for Woolworths' margin and total sales.
The Dan Murphy's drink segment didn't have an amazing half but did still manage to grow sales and EBIT, so it was a contributor to the group's result.
Big W's EBIT loss lessened with sales growing slightly and EBITDA more than doubling to $29 million.
Overall, compared to the last few years, I thought this was a pretty good result for Woolworths and shows its initiatives are working. Management have also put Masters in the past and that has helped the bottom line too.
Foolish takeaway
Ultimately, I think it depends if the Woolworths supermarket sales and EBIT can keep growing. Woolworths is quite expensively priced at 22x FY18's estimated earnings considering that its growth will be limited and unsure over the next few years. I applaud management for turning around the business, but I don't think it's a market-beating opportunity today.