Is the Woolworths share price a buy?

The Woolworths Group Ltd (ASX: WOW) share price is down around 5% over the past six months, is it a buy?

Its share price has certainly shown defensive characteristics compared to many of the other popular growth shares that have fallen by at least 10%, if not 20%, in recent months.

Woolworths is Australia’s largest supermarket business. Food is seen as a defensive industry seeing as we all have to buy food each week.

A couple of years ago Woolworths was under price pressure from Aldi and was experiencing sales declines. But, over the past year or two management have done very well to improve the shopping experience for shoppers with lower prices and a good quality offering.

Price is a big factor for shoppers. But there are other reasons too such as quality of the food, service standards and conveniently-located supermarkets.

In the first quarter of FY19, Woolworths reported that its main Australian Food division had grown sales by 1.9% with comparable sales growth of 1.8%. The Endeavour Drinks segment, which includes Dan Murphy’s, reported quarterly sales growth of 3% on the back of 1.7% comparable sales growth. Pleasingly, Big W reported sales growth of 1.3% and comparable sales growth of 2.2%.

All of the above numbers say that Woolworths is facing tough retail conditions, but it’s still managing to increase sales slightly – this should be expected with population growth and inflation both helping sales over the long-term.

It will be interesting to see how Woolworths handles a challenge from a separate Coles Group Limited (ASX: COL) business, which was recently divested from Wesfarmers Ltd (ASX: WES). Aside from investing in logistics and warehouses, I’m sure Coles management are planning other initiatives to challenge Woolworths. One announced plan is for smaller format Coles in high-density city areas.

Another threat Woolworths faces is Amazon. The obvious danger is to Big W, but over the longer-term Amazon may turn into a major online food competitor.

However, Woolworths is creating its own online retail ‘empire’. In the first quarter trading update Woolworths said that group online sales growth was 28% and Woolworths Online was awarded the Canstar Blue 2018 award for most satisfied customers.

Foolish takeaway

Woolworths is trading at 22x FY19’s estimated earnings with a grossed-up dividend yield of 5%.

Whilst Woolworths is a defensive business, I don’t think the current growth rate justifies the valuation with competition growing in the supermarket world.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET. 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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