Woolworths Group Ltd (ASX: WOW) shares have dropped close to 20% since 28 August 2024, as the chart below shows. When a defensive ASX share falls that far, it can be a good idea to consider if the business is a buy-the-dip opportunity.
The business has suffered from a number of different issues such as slowing food inflation, political scrutiny and a strike impacting the company's supply chain.
Woolworths is also facing economic challenges in some of its businesses, particularly BIG W, which is hurting profit growth.
Below, I'll share my view on Woolworths shares.
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Pros
While Woolworths experienced difficulties in its Australian food business, it managed to grow sales in every single division in the first half of FY25.
Australian food sales rose 2.7% to $26.7 million, Australian business-to-business sales increased 5.5%, New Zealand sales grew 2.7% (in New Zealand dollar terms), and W Living sales grew 16.1%.
While the supply chain strike was painful, it was a one-off that the company has hopefully recovered from by now. It should be able to report stronger growth in the HY26 result and FY26 result as its comparative period will include the weaker, disrupted HY25 result.
There are a number of growth areas within the business, helping offset some of the headwinds experienced by the Australian food division, though they are starting from a small base.
Group e-commerce growth was 18.3%, with strong 'same-day' and 'on-demand' growth in the first half through a convenience proposition and Milkrun expansion.
It also said that it has expanded the Woolworths MarketPlus with gross merchandise value (GMV) of $246 million, up 41.7% year over year. There are now over 400,000 items on the BIG W market.
According to the forecast on Commsec, Woolworths' share price is just 19x FY26's estimated earnings. That seems cheap to me.
Cons on Woolworths shares
For starters, the major supermarkets are now facing a lot of political scrutiny. According to reporting by the ABC, Labor has said it will heavily fine price gouging by supermarkets, while the Coalition has suggested it could create divestiture powers to break up the Woolworths and Coles Group Ltd (ASX: COL) if they behave anti-competitively.
The second negative aspect of the business is that it's already a huge business with a significant national presence. I think the business can continue growing profit, but due to its size, it may be at a slower rate than in the past. However, its scale advantages enable stronger profit margins than if it were smaller.
Lastly, while it's great for households that inflation has reduced, it has lowered the sales growth rate for the Woolworths food business.
Overall, I think Woolworths shares do look appealing at this valuation. We all need to eat, so it's very defensive, and there's scope for profit to bounce back in the next few years.
