The Woolworths Group Ltd (ASX: WOW) share price is trading lower again this afternoon. At the time of writing, the share price is down 0.81% to $28.28.
The drop follows a dramatic 14.7% nosedive in the share price at the close of the ASX yesterday, after the retailer posted its FY25 results.
The share price is now 22.77% lower than this time last year.
And now Macquarie Group Ltd (ASX: MQG) has downgraded its rating on the shares.
First, a quick recap on how the group performed in FY25.
Snapshot of Woolworths FY25 result
The company reported a 3.6% year-on-year increase in sales (normalised), and Woolies eCom sales surged 17.1%.
Margins came under pressure over the year, however, with the gross margin slipping 0.07% to 27.2%. And costs were up, with the company reporting a 0.66% increase in its CODB to 23.3%.
Earnings before interest and tax (EBIT) in FY25 also dropped 12.6% and net profit after tax (NPAT) was down 17.1%.
Headwinds set to continue for Woolworths
In a recent note to investors, the broker downgraded Woolworths' rating to neutral, from outperform last month.
It also lowered its 12-month target price to $30.30, down from $33.40 previously.
After yesterday's sell-off, that represents a potential 7.14% for investors at the time of writing.
"Valuation: Target price down 9% to $30.30 (prev. $33.40), driven by our earnings changes, and a 10bp reduction in the RFR to 4.20%," the broker said in its note.
"Downgrade to Neutral. We see challenges as likely to persist in the nearterm, with ongoing price reinvestment a potential, as WOW looks to improve customer perceptions and regain market share."
Woolworths loses customers to cross-shopping
Macquarie also noted that the group's weak FY25 result provided limited insight into its short-term strategy to rectify performance issues.
"We are told customers "love WOW" based on improving NPS scores but this isn't translating into profitable sales. WOW's focus is the "medium term" but the market values time and compounding and there is little confidence management can deliver," it said.
"Grocery is the most contestable retail segment with grocers needing to win every day. The frequency of purchase means performance can turn quickly. It's not clear if WOW made mistakes and/or competition was the most disruptive factor."
But Macquarie does offer an explanation for the lacklustre results:
Cross-shopping is huge in grocery retail, particularly between WOW and COL because both are omnipresent. Based on Fonto data, we know 31% of WOW customers also shop Coles and 11% also shop Aldi. We know 38% of Coles shoppers shop WOW. We suspect WOW is missing this aspect of customer behaviour. Their customers are still in-store and claim they "love" WOW, but the cross-shop piece is growing! Equally, we suspect the percentage of COL shoppers also shopping WOW is dropping. These are subtle behavioural changes but with material impact.
