The Woolworths Group Ltd (ASX: WOW) share price has been a strong performer since the start of the 2023 calendar year, gaining 17%. It has soundly beaten the S&P/ASX 200 Index (ASX: XJO), which has risen by 4.5% in the year to date.
For an ASX blue chip share to outperform the ASX 200 by more than 12% in a relatively short period of time is an impressive performance in my opinion.
The market typically pays the most attention to a company's most recent update and outlook commentary, so what happened in 2022 is old news. Let's start by looking at what Woolworths reported in the third quarter of FY23 and then decide if its current valuation makes investment sense.
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Sales recap
Woolworths saw Australian food sales increase by 7.6% to $12.3 billion, while total sales increased 8% to $16.3 billion. Other parts of the business include its New Zealand food sales (up 7%), BIG W sales (up 5.7%), and business-to-business sales (up 16.4%).
It was a very solid quarter of growth for the business. However, it's worth noting that Woolworths supermarkets got a boost from the 5.8% change in average prices. It blamed this inflation on supplier cost price increases.
There was positive news, however, with improved fruit and vegetable growing conditions and lower livestock prices. Woolworths also said the cycling of inflation in the prior year contributed to its slowdown in the third quarter compared to the second quarter rate of 7.7%.
The ASX share market is usually forward-focused, so the outlook is likely what investors are paying attention to the most when it comes to the Woolworths share price.
Outlook
Woolworths CEO Brad Banducci revealed in the first weeks of the fourth quarter of FY23, sales trends had "been in line with Q3 with solid sales growth" in the supermarkets, with growth moderating in BIG W.
It's seeing signs of overall food inflation "moderate" but in many areas, inflation remains "frustratingly elevated", according to Banducci.
Woolworths said that it's going to continue to work hard to provide customers with "great value" across the shopping basket, including affordable protein, leveraging its own and exclusive brands, among other strategies.
My verdict on the Woolworths share price
I don't think it's too surprising that Woolworths has been a strong performer because its sales (and presumably profit) have benefited from inflation — and that inflation seems to be continuing.
With the economic outlook uncertain, given the run of interest rate increases and inflation, investors appear to be seeking the safety of defensive ASX shares.
Also, Australia's population continues to grow, which is a helpful tailwind for Woolworths' earnings in the coming months and years in my view as there are simply more potential customers to feed.
According to estimates on Commsec, the Woolworths share price is valued at 28 times FY23's estimated earnings. The projections also suggest that earnings per share (EPS) could rise by 16% to FY25. Over the long term, share prices usually follow profit, so profit growth is a promising prospect for Woolworths shareholders.
However, with the business close to its 52-week high, as we can see on the chart below, it's possible that there could be a cheaper share price later this year if investors are prepared to be patient.
