Are Woolworths shares a strong buy right now?

Should investors put Woolworths shares in their shopping basket?

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Woolworths Group Ltd (ASX: WOW) shares are up 16% this year but the business has been drifting lower over the last couple of months, as we can see on the chart below.

In this article, we're going to look at whether analysts think the ASX retail share is a buy.

The last three years have been very positive for the supermarket sector. First, there was the huge demand during the COVID-19 grocery stockpiling in 2020 and, in the last year or so, inflation has provided a sales boost.

Investors usually pay attention to a company's last update and its forecast for what it expects next. So let's remind ourselves what was in Woolworths' latest trading update.

Quarterly sales recap

Woolworths reported in its FY23 third quarter, its total sales increased by 8% to $13.3 billion, driven by its Australian food division delivering sales growth of 7.6% to $12.3 billion.

Impressively, BIG W was still able to deliver sales growth of 5.7% to $1.05 billion and the Australian business-to-business (food) division experienced a 16.4% jump in sales to $1.16 billion.

Its New Zealand segment achieved sales growth, in New Zealand dollar terms, of 8.5%, to NZ$2 billion.

Woolworths pointed out that the change in average prices for its Woolworths supermarket business was 5.8%. That's a high level of price inflation but it wasn't the sole reason for the sales growth. Certainly, inflation seems to have helped Woolworths shares.

This update was at the start of May, so Woolworths was able to give a trading update for the fourth quarter of FY24. It said in the fourth quarter to date, which essentially meant for April, sales trends were "in line with the third quarter", with "sales growth" in its food businesses and growth moderating at BIG W.

In terms of the outlook, Woolworths said:

Looking ahead, we're seeing signs of overall inflation moderate in Food. However, in many areas inflation remains frustratingly elevated and we need to continue to work hard to provide our customers with great value across their shopping basket. This includes a focus on affordable protein, further leveraging our own and exclusive brands, our seasonal 'prices dropped' program and personalised Everyday Rewards member offers.

What do analysts think of the Woolworths share price?

Woolworths is one of the defensive ASX shares because everyone needs to eat. With the cost-of-living difficulties households are facing, it's possible that Woolworths could see more demand if Aussies cut back on eating out.

According to analyst ratings that Commsec has collated, there are currently seven buy ratings on Woolworths shares, five holds, and five sells. That's quite a diverse and fairly evenly spread range of ratings.

According to estimates on Commsec, Woolworths shares are valued at 27x FY23's estimated earnings, with a possible grossed-up dividend yield of 3.8%. Investment bank Goldman Sachs is currently one of the brokers that think Woolworths is a buy, with a price target of $42.20. That implies a possible rise of 10% within 12 months if the broker's forecast ends up being accurate.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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