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.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.