Is Woolworths run as Australia’s best retailer over?

Is Woolworths run as Australia’s best retailer over?

Woolworths (ASX: WOW) shocked the market on Tuesday when it reported its slowest quarterly sales growth for twelve years – all the more shocking after Wesfarmers (ASX: WES) reported fantastic sales numbers for Coles only last week.

Same store sales in Australian food and liquor grew at about 3%, roughly half that achieved by Coles over the same period. And that excludes the disappointing numbers from Big W and the disastrous performance of hardware division Masters which continues to chew up capital and make no inroads into Bunnings’ market dominance.

It seems a lifetime ago that WES was being blasted for the poor performance of Coles since it bought the supermarket chain just before the GFC hit. But after a slow start, Coles has continued to gain market share while improving margins and returns. And amazingly there is still ground to be made up in areas and WOW just doesn’t seem to be up for the fight, and perhaps has been too distracted with its attempt to conquer the hardware market.

What's the outlook for JB Hi-Fi? Read our recent post here.

It’s been a rough few years for WOW with its former subsidiary Dick Smith (DSH) revitalised under new management and the misjudged entry into the hardware market. The market punished the stock on the day of the update, with the stock dipping 5% on the close.

That selling continued yesterday with the stock reaching a low of $33.11, a price not seen since last December. Interestingly CEO Grant O’Brien stated that WOW would not need to adjust its profit guidance but clearly the market has seen through that and punished the stock savagely.

While WOW remains a fantastically defensive business, there is little doubt that management is starting to be questioned for the first time in many years. That could potentially lead to further de-rating of the stock beyond what has already occurred on the perception of lower future earnings. So while we think WOW is still likely to be an excellent long term investment (with some of the best retail assets in the country), the short term could be cloudy while Coles continues to gain at WOW’s expense.

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