The Woolworths Group Ltd (ASX: WOW) share price has dropped 25% since June 2023 and close to 20% from 28 August 2024. On Friday, it dropped to a 52-week low of $29.79.
As the chart above shows, Woolworths' supermarket business has declined significantly since the COVID and elevated inflation periods.
However, the sell-off could be an opportunity. We all need food, and demand isn't exactly dropping at Woolworths' supermarkets.
In the recent FY25 first quarter result, Woolworths told the market that its total group sales rose 4.5% year over year to $18 billion, with total e-commerce sales growth of 21.2%. Australian food sales rose by 3.8% to $13.6 billion, and Australian business-to-business (B2B) revenue increased by 6.9%.
However, there are some negatives for investors to be aware of aside from the ongoing regulatory attention on Woolworths' discounting practices.
Negatives from the quarterly update
Woolworths has been focused on providing more value to customers with increased promotional activity at its supermarkets, as customers responded "strongly" to specials and larger savings. While this helped sales growth, it led to lower margin sales. E-commerce growth has also impacted margins.
The company said the Australian food operating profit (EBIT) margin is forecast to be "below" previous expectations. HY25 EBIT, including $40 million of incremental supply chain costs, is expected to be within a range of $1.48 billion to $1.53 billion, compared to $1.6 billion in HY24.
Investors obviously don't like to see profit declines, which may be hurting the Woolworths share price.
Woolworths is expecting customers to remain "extremely value-conscious with cost-of-living pressures to continue for the remainder of F25". The company will focus on providing value going into the crucial Christmas and holiday trading period.
The company also warned that wage cost growth will remain "elevated" this financial year.
I'll also point out that supermarket inflation, excluding tobacco, declined by 0.8% in the FY25 first quarter. While elevated inflation wasn't great for households, it meant Woolworths revenue was rising quickly for the same basket of goods. Not anymore.
Is the Woolworths share price a buy?
In a note to investors, broker UBS highlighted the problems Woolworths faces, such as increased promotional activity and faster-than-expected online sales growth harming margins. UBS said:
WOW has not always been prudent in capex & opex [capital and operating expenditure] in recent years with growth the dominant priority vs cost management. Hence there is significant investor desire for cost savings to be announced, although questions exist about execution capabilities.
The broker also thinks there will be a greater focus on growth and profitability for the ASX share's new 'W Living' division, which includes Big W, PETstock and other emerging businesses (including Healthy Life and Woolworths Market Plus).
Following the update, UBS decided to give a neutral rating to Woolworths shares. Its price target on the ASX share is $31.25, a reduction from $33. A price target is where analysts think the share price will be in 12 months from the rating.
The $31.25 target implies a possible rise of approximately 5% from the current Woolworths share price level. However, UBS is expecting a sizeable cut for the dividend per share in FY25, with an annual payment of 94 cents per share. That works out to be a dividend yield of 3.1%, excluding franking credits.
