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Is the Woolworths share price a buy?

Is the Woolworths Group Ltd (ASX: WOW) share price a buy after its September 2019 quarter sales update and the wage underpayment news?

The September 2019 quarter was an excellent update. Total sales grew by 7.1%. Australian Food sales increased by 7.8% with comparable growth of 6.6%. New Zealand Food sales increased 8%, Endeavour Drinks sales rose 4.9%, Hotels revenue grew 5.5%, even Big W sales increased by 2.6%.

Woolworths management attributed the performance in Australian Food to the Lion King Ooshies and Discovery Garden successes, whilst online sales grew by 43.2%. Average prices increased by 0.3% despite deflation in fruit & veg. Big W growth was boosted by its key apparel segment.

Overall, a great sales update.

But it was spoiled by the news that Woolworths had underpaid staff under the General Retail Industry Award (GRIA).

Woolworths team members are entitled to be paid the higher of their contractual salary entitlements, or whatever they would have earned for actual hours under the GRIA. Woolworths’ review found the number of hours worked, and when they were worked, were not adequately factored into the salary settings for some salaried store staff.

The first repayments (with interest and super contributions) will be made before Christmas for the period September 2017 to August 2019.

But now the review is being extended to the entire Woolworths business. Using some modelling, the remediation could date back as far as when the award was implemented in 2010 according to Woolworths. This could mean a total cost of $200 million to $300 million before tax.

Considering net profit from continuing operations (before significant items) was $1.75 billion in FY19, the remediation will be a sizeable reduction of FY20’s profit.

Foolish takeaway

The Woolworths share price has been a strong performer this year, but it looks expensive to me unless it can continue high single digit growth for more than one quarter.

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Motley Fool contributor Tristan Harrison has no position in any of the 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 Scott Phillips.

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