Has the market jumped the gun on Woolworths (ASX:WOW)? Its share price has been on a tear the last two months, up 21%. And last week, Mr Market got particularly excited about a little sentence in its 2016 financial report. Tucked away on page 77 of 101 it reads “Comparable sales for the eight weeks ended 21 August 2016 increased by 0.3%.”
Could it be that quarter after quarter of sales declines have come to an end?
And does this mean that Woolworths has turned the corner?
One only needs to look at its competitors to remain concerned. Wesfarmers (ASX:WES) owned Coles has upped the ante in the supermarket price war. After two years of lowering prices by just over 1% annually, in the final quarter of 2015/16 Coles dropped prices at an annualised rate of 2.4%. As you can see in the chart below, Coles isn’t pulling any punches when it comes to price.
Source: Wesfarmers 2016 Full-year Results Briefing Presentation
Woolworths isn’t holding back either. Its price cuts kept growing in recent quarters.
Source: Woolworths 2016 Financial Report
And we haven’t even mentioned Aldi yet, the low price leader who is rapidly gaining share of the Australian consumer’s supermarket dollar. So while Woolworths outlined a few small positives at its annual result last week, price competition is heating up and this won’t bode well for its profitability.
A thoughtful article on the supermarket subject, Thank you for other thought-provoking items in recent days on hybrids and ‘complex investing’. I’m not currently an investor in Forager Funds but your recent blogs suggest I should consider doing so.
Thank you, Bob Cairns
Agreed but also adding concern for the Australian supermarket business was that of the EBIT margin crunch from 7.33% to 4.47% only 0.82% came from lower gross margins while a whopping 2.04% came from an increase in CODB. If WOW’s supermarket business was truly improving its competitive position shouldn’t the gross margin/CODB percentage changes, at a minimum, have been the other way around.
I’m also guessing that light at the end of the tunnel is still a train.
I’m not surprised that CODB is increasing. Woolworths has been increasing the staff numbers in there stores. I would expect that there is more pain on the CODB side as Woolworths rectifies the underlying issues which put them in this position.
Agree with Daniels view, the market has reacted to management having a plan going forward around Masters and a small improvement in sales growth. It is going to take a lot longer to finish turning this ship around.
Great chart. Sums up the Coles strategy up without a single word.
I don’t get why the market overemphasises changes that cross the zero threshold so much more than other changes. In theory a rise/fall of x% in a variable should have a similar effect on a stock’s valuation irrespective of whether it crosses zero, but in practice the market tends to completely demolish companies that slip from growth to shrinkage whilst hyper inflating those that do the opposite.
One does not have to be a rocket expert as the saying goes!
After a lot of thought ( one presumes ! ) WOW have come out with a points offer to customers.
Spend $1; get 1 point. Then once you have 2000 points_ i.e. $2000 later, you get $10 back!
Which equates to 1/2 cent for every $ spent. Can’t see customers rushing in!