Is the Woolworths share price a bargain?

The Woolworths Group Ltd (ASX: WOW) share price is trading flat for 2020 and could be a potential bargain for long-term investors, in my view.

Despite experiencing unprecedented demand during the coronavirus pandemic, the supermarket giant’s share price has struggled to gain traction as costs mount.

Rising costs blocking surging sales

Earlier this week, Woolworths released a trading update that detailed the company’s 4th quarter performance to date. Woolworths reported food sales in Australia were up 8.6% for the quarter, while sales in New Zealand jumped more than 15%. Sales at Big W also surged 27.8% in the 10 weeks to 14 June as shoppers returned, while the company’s Endeavour drinks business saw sales grow another 21% for the same period.

However, despite continued record growth in sales during the pandemic, Woolworths has also seen a jump in costs. As a result, the company revised its earnings before interest and tax to a range between $3.2 billion and $3.25 billion, below analyst estimates of $3.32 billion.

Woolworths cited $275 million in extra costs due to precautionary procedures imposed by the pandemic such as more cleaning, labour and extra warehouse space. In addition, the company plans to spend approximately $780 million on 2 automated distribution centres in Sydney and also revealed $500 million in underpaid wages that have added to costs.

Analysts mixed on outlook

A recent article in the Australian Financial Review highlighted the mixed consensus among equity analysts on the future of the Woolworths share price. According to the article, analysts from Goldman Sachs revised their net profit target for 2020 down by 6.4%, while also lowering their share price target for Woolworths to $35.90.

Analysts from broker UBS also estimated that Woolworths will see a 5% to 6% fall in earnings between 2020 and 2022. However, despite the forecasted fall in earnings, analysts believe that the supermarket giant will emerge from the pandemic stronger and retained a ‘buy’ recommendation on the company.

Should you buy?

The Woolworths share price opened the year at around $36 dollars and despite volatility finds itself trading around the same price in late June. The coronavirus pandemic saw unprecedented demand and also changed the shopping behaviour of many consumers. As a result, despite the potential windfall, Woolworths has had to invest heavily in adapting to this new consumer behaviour.

Recently, renewed predictions of a ‘second wave’ of coronavirus infections have reignited fears amongst consumers. This has resulted in some of the panic buying that was documented earlier this year, forcing Woolworths and other supermarkets to impose buying limits on certain items. In the short-term, panic buying could continue to fuel growth in sales.

In my opinion, Woolworths could be a bargain buy for the long-term is the company’s investment in streamlined supply-chains and better online services, both of which could see the supermarket giant adapt faster to changing consumer behaviours.  

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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Woolworths Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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