Woolworths Group Ltd (ASX: WOW) shares had a difficult time on Wednesday and were sold off by investors.
The retail giant's shares ended the session 6% lower at $30.81.
This leaves them trading within touching distance of a 52-week low.
Why did Woolworths shares crash?
Investors were hitting the sell button yesterday after Woolworths released its first quarter update.
Although Woolworths reported a solid 4.5% increase in group sales over the prior corresponding period to $18 billion, earnings from its key Australian Food business disappointed.
Management revealed that it currently expects "H1 F25 EBIT, including $40 million of incremental supply chain costs, to be within a range of $1,480 million to $1,530 million compared to $1,595 million in H1 F24."
This sparked fears that Woolworths is sacrificing margin to boost its market share.
What are analysts saying?
The team at Goldman Sachs has been running the rule over the update and has concerns that it could be "distracted in its core business and spending too much on experiments."
Nevertheless, the broker sees opportunities for Woolworths to be more efficient in the second half. It explains:
We see three specific areas for WOW to improve into 2H25: 1) Promotional effectiveness: Management noted opportunities for tighter promotions mix leveraging NexGen promotional tools as well as ensuring balance between promotions and EDLP. 2) Cost out program: Management noted that AU Foods is on-track for hundreds of millions of dollars of productivity in FY25 and several initiatives are being accelerated including support cost optimization, stock loss mitigation and organization simplification.
3) Step-up in profitable ancillary services: AU Foods online sales grew ~24% YoY in 1Q25 with Cartlogy growing ~15% YoY. We believe the continued growth of high margin Retail Media will further enable WOW to invest in price to gain share. GSe Retail Media can scale to ~A$1.4B sales and ~478mn in incremental profit (~12% of AU Foods EBIT) by FY30.
Should you invest?
Goldman Sachs thinks that Woolworths shares are trading at a very attractive level.
According to the note, its analysts have reaffirmed their buy rating but cut their price target to $36.20 (from $39.20).
Based on the current Woolworths share price, this implies potential upside of 17.5% for investors over the next 12 months.
Goldman also expects a fully franked 3.1% dividend yield in FY 2025, lifting the total potential return beyond 20%. It concludes:
While WOW is facing transition challenges as its new CEO recalibrates WOW's strategy against a value consumer, we believe that WOW's structural advantages of its store network, scaled online position and leading data/analytics capabilities will enable market share wins in the medium term. WOW is FY26 P/E of ~21x vs historical avg 26x.
