Could the Woolworths Group Ltd (ASX: WOW) share price be an opportunity as the ASX supermarket share deals with the current inflation environment?
The business has had a lot to deal with over the last two or so years. The COVID-19 panic buying was a challenge in 2020 and the company has had to significantly scale its e-commerce capabilities.
Woolworths is now dealing with supply chain challenges and inflation.
In the three months to 31 March 2022, Woolworths said that there was a return to COVID-related shopping behaviour in the early part of the quarter, which led to higher in-home consumption in the food businesses along with rising food inflation.
Quarter recap
Australian food sales increased by 5.4% in the third quarter, with Woolworths retail sales increasing by 5.2%. Average prices increased by 2.7%, reflecting "widespread industry cost pressures." E-commerce sales growth remained "strong" at 38.1%, despite COVID and flood-related disruption resulting in sales penetration of 9.9%.
Australian business to business sales increased by 217% largely driven by PFD and Endeavour Group Ltd (ASX: EDV) partnership revenue not included in the prior year.
New Zealand food total sales increased by 3.8% despite lower item growth, with average prices increasing by 3.6%. E-commerce sales increased by 18.3%.
Big W sales declined by 3.5%. This is compared to 18.3% growth in the prior year.
Woolworths said that trading momentum in the fourth quarter to date has continued in Australian food and Big W with "strong Easter seasonal trade." However, COVID impacts are expected to affect the FY22 second half earnings before interest and tax (EBIT) with a forecast range of between NZ$120 million to NZ$140 million, representing a decline of 16% to 28% compared to the second half of FY21. Those impacts and costs are largely associated with keeping the "customers and team safe and minimising disruption" to the supply chain.
It has been reducing its direct COVID costs in areas where it's no longer required.
Woolworths acknowledged the cost-of-living pressures that are being felt by customers and the team. It's supporting the position for an increase in team member wages that keeps pace with underlying cost-of-living increases.
Could the Woolworths share price be a buying opportunity?
Brokers are quite mixed on the business at the moment.
UBS currently rates Woolworths as sell, though the price target is only $36. It notes that suppliers are wanting to pass on costs and price increases. However, it's Coles Group Ltd (ASX: COL) which is the broker's pick in the sector.
Credit Suisse also has a negative rating with a underperform rating with a price target of $33.89. This broker thinks that elevated COVID-19 costs are a drag on Woolworths.
However, on the positive side is Ord Minnett with a price target of $40. It likes it as the market leader and it is able to pass on higher costs to shoppers with higher prices.
Valuation
Ord Minnett thinks the Woolworths share price is valued at 33 times FY22's estimated earnings and 39 times FY23's estimated earnings.
However, Credit Suisse thinks that Woolworths shares are valued at 33 times FY22's estimated earnings and 29 times FY23's estimated earnings.
