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Why the Woolworths Group Ltd (ASX: WOW) share price is rallying as sales growth hits a 2-year low

The Woolworths Group Ltd (ASX: WOW) share price jumped this morning even after the retailing group posted its quarterly update that showed sales growth at its supermarket division falling to a two-year low.

But don’t get too bearish on the stock. Shares in Woolworths gained 1.1% to $28.71 as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index inched up 0.2% in early trade.

Comparable sales at Woolies supermarkets improved 1.8% in the September quarter (1.9% overall) over the same period last year.

This is a significant slowdown compared to 4.9% growth in the September 2018 quarter and the 5.1% growth that Coles delivered in the latest quarter.

Investors should take a glass half-full view of the results though. The slowdown at Woolies was expected given Cole’s highly effective Little Shop sales campaign, the impact of the removal of single-use plastic bags and ongoing food price deflation.

What’s encouraging is that Woolies has regained market share lost to Coles since the Little Shop promotion ended and that the drop in the growth rate is still better than what most analysts were expecting.

The average prices of groceries (excluding tobacco) may have fallen 2.5% in the latest quarter but it’s better than the 4% drop experienced a year ago. Food price deflation will probably moderate even more over the coming periods as the price of a range of groceries have recently increased due to the drought.

The other piece of news that I think is more significant is sales at its Big W department store. Comparable sales at Big W jumped 2.2% (1.3% overall) for the quarter and that will be welcomed news given that the business has been a real dog.

To be fair, it isn’t the only retailer that’s been under the pump. Wesfarmers’ Target chain is also a pain in the posterior for management and we don’t really need to talk about the collapse in Myer Holdings Ltd’s (ASX: MYR) share price or Lovisa Holdings Ltd‘s (ASX: LOV) share price.

This doesn’t mean Big W is out of the woods but at least it isn’t sliding backwards in the face of increasing online competition.

The divestment of Woolworths’ petrol business is progressing, and the higher petrol price has bolstered comparable sales of this division by 8.1%.

The group’s other businesses such as Hotels, its liquor retailing business and its New Zealand food division all reported growth as well.

Woolworth’s gain is Wesfarmers Ltd’s (ASX: WES) pain. Wesfarmers’ share price fell 0.5% to $46.41 at the time of writing.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. 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 Scott Phillips.

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