Why is the Woolworths share price flat for 2020?

Despite the surge in consumer demand, the Woolworths share price remains flat for 2020. We take a look at the possible reasons for this.

| More on:
shopping trolley filled with coins representing asx retail share price.ce

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The coronavirus pandemic saw shoppers flock to supermarkets around Australia to panic buy essentials and non-discretionary items. Despite the surge in consumer demand, the share price of Australia's largest supermarket retailer, Woolworths Group Ltd (ASX: WOW), remains flat for the year.

So, is the Woolworths share price a long-term bargain and should you buy?

How has Woolworths performed?

Late last month, Woolworths reported its strongest quarterly sales growth in more than a decade. The group's sales surged more than 10% to $16.5 billion for the quarter, with supermarket sales rising more than 40% in the week ending March 22. Long-life items such as toilet paper, pasta, flour and bread mixes fuelled sales growth as consumers rushed to stock up their pantries.

Woolworths saw total sales within its Endeavour Drinks business rise 9.5% for the quarter to $2.25 billion. Boasting brands such as Dan Murphy's and BWS, Endeavor Drinks reported a surge in sales as consumers stocked up on takeaway liquor amid fears surrounding lockdown restrictions.

All of this should have been a boost for the Woolworths share price. However, following the federal government's response to the coronavirus pandemic, the company closed the operations of its Hotels business in late March and, as a result, sales dropped more than 12% for the quarter.

$5 million boosts from Marley Spoon

Woolworths has also made a handy profit from its stake in subscription-based meal kit provider Marley Spoon AG (ASX: MMM). The Marley Spoon share price has surged around 400% since mid-March as the company enjoyed a boom in demand for at-home meal consumption.

As a result, according to the Australian Financial Review (AFR), Woolworths stands to make approximately $5 million in profit from its stake in the meal box delivery service. In 2019, Australia's largest retailer invested $30 million in Marley Spoon through a debt and equity transaction. The deal issued Woolworths with 8.2 million in ASX-listed chess depositary notes in Marley Spoon at 50 cents each.

Why is the Woolworths share price flat?

Despite strong sales growth in its supermarket and liquor divisions, as well as profit from its stake in Marley Spoon, Woolworths has also incurred increased costs. According to the company's management, increased costs for wages, security, supply chain and e-commerce will partially offset sales growth.

In order to satisfy consumer demand whilst also maintaining social distancing measures, Woolworths saw costs soar between $70 million and $90 million in March. These costs are expected to increase to a range of between $220 million and $275 million for the June quarter as Woolworths looks to prepare itself for future trading amid a potential second wave of the pandemic.

Should you buy?

The Woolworths share price is currently trading on a price-to-earnings ratio of around 27 times future earnings, which could prompt some investors to assess the stock as being too expensive. In my opinion, even though Woolworths has seen a surge in costs and substantial losses in its hotel business, the company's share price still looks attractive for long-term growth.

There are, however, many moving parts in the short term, given the uncertain trading environment resulting from the coronavirus pandemic. For this reason, I think a prudent strategy would be to see how Woolworths handles future costs before making an investment decision.

Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Woolworths 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.

More on Coronavirus News

Man with his hand on his face looking at a falling share price chart on a tablet.
Share Market News

ASX 200 stocks dive 2.4% in worst trading day since Ukraine crisis hit

It's not a good start to the week for the market.

Read more »

A woman looks nervous and uncertain holding a hand to her chin while looking at a paper cut out of a plane that she's holding in her other hand. representing the falling Air New Zealand share price today
Travel Shares

Borders just reopened so why is the Flight Centre (ASX:FLT) share price falling today?

Experts believe it may take several years for tourism levels to rebound to pre-pandemic numbers.

Read more »

A worker in hi vis gear holds his hand up saying no.
Coronavirus News

Own BHP (ASX:BHP) shares? Here's how the ASX 200 miner is battling COVID

Mining unions have not generally supported mandatory vaccinations.

Read more »

Female worker sitting desk with head in hand and looking fed up
Coronavirus News

Here's what Rio Tinto (ASX:RIO) boss says is 'causing some challenges' right now

The Omicron variant is spreading in Western Australia.

Read more »

A man wearing a mask punches the air with joy after getting a negative COVID result on a rapid antigen test.
Coronavirus News

Why are ASX COVID test shares climbing today?

COVID-19 tests are in focus again today.

Read more »

a girl stands in an apple orchard holding two red apples in raised arms with a happy, celebratory look on her face with a large smile and a pretty country background to the picture.

CBA reveals the Australian economy's leading state amid COVID surge

The states and territories have all been impacted by the pandemic.

Read more »

Rapid Antigen Test taking place.
Share Market News

Why is Ellume hitting headlines today?

Brisbane-based diagnostics developer Ellume is back in the headlines.

Read more »

A woman looks quizzical as she looks at a graph of the share market.
Share Market News

Inghams (ASX:ING) share price sinks as Omicron bites

Inghams shares are down as COVID hurts its operations.

Read more »