The Woolworths Group Ltd (ASX: WOW) share price has been drifting lower in the last few weeks. Since 21 June 2023, it has declined by close to 7%.
That said, the ASX supermarket giant is still up more than 13% since the start of 2023. That's much better than the S&P/ASX 200 Index (ASX: XJO), which is actually down by 0.3% in 2023 to date.
Let's look at the positives and negatives of investing in Woolworths shares in the current environment.
It's worth acknowledging the business is one of the most defensive ASX shares around, at least when it comes to its revenue. We all need to eat, and Woolworths is one of the main food retailers in Australia (and New Zealand).
It's possible that as economic conditions bite into household budgets, more people will turn away from restaurants and cafes, and turn to supermarket-bought food instead.
As well, Australia's population continues to grow. The latest quarterly increase showed a rise of 181,600 over the three months to March 2023 and an annual increase of 563,200. That's an extra 563,200 mouths that need feeding and potentially more customers for Woolworths, which could be a tailwind for Woolworths shares.
At the same time, inflation continues to run hotter than pre-COVID times, which is a benefit for Woolworths' revenue. In comments about its outlook, Woolworths said it expects food inflation in Australia and New Zealand to "continue to moderate but will likely remain elevated in some packaged categories".
I like that the business is moving to diversify its earnings, with expansion in the business-to-business (B2B) food supply sector and the recent acquisition of a majority of the business that owns PETstock.
Negatives surrounding Woolworths shares
On the other side of the coin, Woolworths looks comparatively more expensive than Coles Group Ltd (ASX: COL) on a forward price/earnings (P/E) ratio basis, though that may be justified by its better performance in operational growth terms.
According to Commsec, Coles shares are valued at under 21 times FY24's estimated earnings, while the Woolworths share price is valued at under 25 times FY24's estimated earnings.
Woolworths is expecting FY24 to see costs impacted by "material wage increases and inflation in energy and transport". It also said it's going to have a "strong focus on delivering value" for customers. It sounds like the earnings before interest and tax (EBIT) margin may take a hit in FY24.
BIG W sales are being challenged by the weaker economic environment, with sales down 6% in the year to date at the time of the FY23 result release.
Finally, due to the size of Woolworths and the nature of supermarket retailing, I'm not expecting a huge amount of growth over the next three to five years.
I think Woolworths is a very strong, established business with several competitive advantages, such as its logistics network, which makes it extremely difficult for new entrants to compete.
There are a number of things to like about Woolworths, but it's still not cheap enough to make me want to invest in it above other potential opportunities.