Shares in Woolworths (WOW) took another pounding yesterday as investors continued to reassess the form of the country’s biggest retailer in the wake of the disappointing first quarter sales performance.
Woolworths shares fell 94c, or 2.7%, to $33.30, taking losses since the release of the weak quarterly sales figures on Monday to 7.6%.
At the close yesterday, the shares ended at their lowest level since December 2013.
Analysts continued to express disappointment with the sales performance, especially in the company’s core Australian supermarkets and liquor business where rival Coles now seems to have the edge.
It was the retailer’s weakest sales and volume growth in a decade and for some retail analysts, there is no co-incidence this has occurred at the same time as the management and board is being distracted by the costly move into hardware which has been very slow to pay off.
WOW 6M – Woolies sales, earnings re-rated after weak Q1 sales effort
As a result of the weak first quarter sales effort, analysts have cut profit forecasts and share price targets for Woolworths, saying the company may have to discount more deeply and more often to regain share from Coles, Aldi and independent retailers led by Metcash’s IGA group.
“In order to improve sales growth, we believe the food and liquor business needs to lift its discounting intensity and effectiveness, which would have negative margin consequences,” according to Citigroup analyst Craig Woolford in a note to clients, who has cut his full-year net profit forecast by $50 million to $2.57 billion.
"In the second quarter, more advertising is likely, along with deeper promotions on high-profile items," he wrote.
Woolworths chief executive Grant O’Brien admitted on Monday that the retailer needed to do more to overcome consumer perceptions that its prices were not as competitive as those of Coles and Aldi.
Woolworths’ same-store sales in food and liquor rose just 2.1% in the three months to October 5 – less than half the rate at Coles – and group sales rose 3%, the slowest growth for at least 12 years and well under the 4.6% reported by Wesfarmer’s group as a whole.
Analysts believe Woolworths will have to spend more on sprucing up stores and improving in-store execution, suggesting that recent cost-cutting measures may have taken a toll on sales.
Morgan Stanley analyst Tom Kierath said Woolies is experiencing rising levels of out of stocks, declining fresh food displays and tired looking stores.
Mr Kierath cut his share price target from $31 to $30 and reduced his net profit forecast from $2.55 billion to $2.53 billion.
Analysts say Woolworths has been losing market share in food for three consecutive quarters, mainly to Coles and discounters Aldi and Costco.
UBS estimates that Woolworths’ share fell 75 basis points in the September quarter, the biggest drop in more than four years.
Food and liquor volumes, after stripping out inflation, fell 2.5%, the steepest decline in 12 years, after sliding 0.6% in the June quarter 2014.
Woolies hardware business is being well beaten by Bunnings, while Kmart is outperforming Big W (and Wesfarmer’s Target chain as well).
