Woolworths - Now is the Right Time to Buy This Stock

Summary: Woolworths is a great long-term buy for your portfolio and the current weakness in the share price provides an excellent opportunity for you to get into this stock. This is a core portfolio stock which every portfolio should have.
Woolworths (WOW) never looks cheap but now is the right time to buy this stock. They have recently released their quarterly sales results and the price has pulled back. I would buy this stock for the following reasons.

1. WOW appears on track to deliver 20% earnings growth over the next two years.
2. WOW gained further market share in the supermarket segment over the period,
3. Big W and Consumer Electronics businesses again recorded improving underlying sales momentum
4. Our 12-month price target of A$32.50, 14% above the current market price.

The recent fall in the price of WOW has provided a buying opportunity. This is a good long- term stock which held up when the market fell last February.

I believe this stock will not be affected by the correction which we are expecting over the coming months and is a core holding in everyone portfolio. WOW is a major player and has structured its business so that it receives a major part of every retail dollar spent. At present WOW has diversified itself across, food, liquor, petrol, hotels, consumer electronics and general merchandise. It is hard to spend money these days with out giving it to WOW.
If you are interested in taking advantage of this opportunity please contact your advisor on 07 4771 4577.

Read the key points below for more detail on the stock.
Australian supermarket sales increased 9.7% in the last quarter. WOW gained further market share in the supermarket segment over the period, increasing its share from 38.7% this time last year to 39.6% this year. That is an increase or 90 bases points. We estimate share losses for Coles Group of 130 bases points.

Market share growth in WOW’s major general merchandise business Big W was more significant. Big W’s share of the Department and Discount Department store segment grew from 16.8% this time last year to 18.7% in the last quarter, an increase of 190 bases points.  Big W’s strong sales were driven by the combined affect of an accelerated roll-out and refurbishment plan, format enhancements and strategic and execution issues at its direct competitor Kmart. The discount department store segment has been one of the weaker retail segments, although Big W is now clearly outgrowing its peers. Consumer Electronics sales increased a respectable 12.7% while comparable store sales rose 7.7%.

Many of Coles strategic initiatives are essentially on the back burner pending the sale process, a significant change in operational improvement is unlikely in the next 12 months.

The Bi-Lo conversion remains partially complete, the current supply chain transformation is behind schedule and senior management appointments remain uncertain. While Wesfarmers may get its hands on the business in October, given the importance of the Christmas trading period, we see it unlikely that any significant initiatives are employed until June 2008. By the time initiatives under new management have the chance to take effect; we believe WOW is likely to have enjoyed another nine to 12 months under current competitive conditions.

The hotels business remains a major growth opportunity for the group, in our view. The business reported sales growth of 8.6% in the last quarter, with comparable sales increasing by 3.3%. A solid result given Taverner was full cycled in February and the impact of smoking bans in QLD.

Gaming sales remained flat for the year but grew by 1.9% in the last quarter. This performance is consistent with historical trends for the introduction of smoking bans whereby sales growth temporarily stalls before returning back to long-term growth trends. However, with approximately 55% of WOW’s hotel portfolio to be impacted by the roll-out of full smoking bans in NSW, VIC and SA over the next four months, we expect gaming revenue growth to remain flat-to-negative in the near-term.

If you are interested in taking advantage of this opportunity please contact your advisor on 07 4771 4577.

Note: This article does not constitute advice to any person. The views expressed here are those of the author and do not necessarily reflect those of ABN AMRO Morgan’s Limited. Advisors in this office may own shares in the companies named here.