Woolworths: another poor result expected

Investors and analysts are bracing for the unveiling of Woolworths’ third-quarter financial results on May 3.

UBS analysts see more hard times ahead for Woolworths.

Investors and analysts are already grimacing as Woolworths prepares to unveil its third-quarter financial results on May 3 following a strong showing from major competitor Wesfarmers on Thursday.

Shares in Australia’s biggest retailer dropped 2.1 per cent last week, their third sharply negative weekly return in the last month, as investors reacted to a healthy 5.9 per cent rise in third-quarter food and liquor sales at Wesfarmers.

UBS analysts see more hard times ahead for Woolworths, leaving their sell recommendation unchanged as they point to a shortsighted approach to profit and cultural issues.

“We continue to believe Woolworths has good ‘bones’ via its leading store network, strong supply chain and great brand, but seems to have lost its way via a short-term focus on profit,” UBS analysts led by Ben Gilbert said.

“Recent data points and our channel checks suggest trading remains challenged and that there could be further deterioration this quarter.

“Pleasingly, however, cultural issues do appear to be bottoming, but are not improving, which is what we would like to see before having confidence in a turnaround.”

Coles’ momentum seemed largely unaffected by heavy investment in price competition from Woolworths, with some analysts suggesting the wounded retailer could go further by instigating a full-blown price war.

“Woolworths has by its own admission lost its way and needs to regain top-line momentum,” Mr Gilbert said earlier this month.

“If the current plan does not work we believe Woolworths will need to be more aggressive, with the obvious level being price.”

While UBS makes it clear no retailer wants a price war, it warns of a growing risk, with Coles poised to capture another 5 per cent of Woolworths’ market share in the next three years. Woolworths is heading towards what will likely be its 27th consecutive defeat to Coles in terms of same-store sales growth, one of several unattractive factors causing investors to flee the blue-chip stock.

The shares have slumped 9.6 per cent in the year to date, compared to a 1.1 per cent fall from the S&P/ASX 200, to close on Friday at $21.72. Woolworths has plunged over 37 per cent in two years, which is equal to more than $20 billion being wiped off the company’s market capitalisation, according to Bloomberg data.

Meanwhile, investors have applauded Wesfarmers for solid growth in its food and liquor arm, but also impressive results from Bunnings and Kmart, with shares gaining 2.8 per cent in the year to date and almost 8 per cent during Woolworths’ horror two-year stretch.

Aside from a potential kami­kaze price war, Woolworths can still deliver some near-term blows to Wesfarmers.

Front of mind for Wesfarmers will be the fate of failed home improvement chain Masters, which remains on the auction block until May 2.

“Wesfarmers is cautious leading into the final stages of the sale of Woolworths’ home improvement business and the potential for increased clearance activity,” Macquarie analysts said.

Credit Suisse analyst Grant Saligari agreed the future of Masters remained a “material variable” for Wesfarmers’ home improvement division in the near-term, but added it could ultimately allow Bunnings to benefit with an additional $200 million in sales, should Masters be completely shuttered.