What’s dragging the Woolworths share price lower today?

Confused woman at a supermarket.

Confused woman at a supermarket.The Woolworths Group Ltd (ASX: WOW) share price is down today as investors get to grips with the latest developments for the supermarket business. At the time of writing, the Woolworths share price is trading down 0.93% at $32.99.

Woolworths is already dealing with elevated inflation on a variety of products, with suppliers asking for price rises. But, Woolworths is also thinking about how to help customers as well.

Price freeze

Earlier this week, the supermarket business announced price freezes on a number of staple products.

According to Seven West Media Ltd (ASX: SWM) reporting, this is the first time that Woolworths has committed to price freezes in a century of operating.

Some of the products that won’t see a price rise this year, which are predominately Woolworths brand products, are: flour, sugar, vinegar, oats, eggs, tea bags, coffee, canned tomatoes, tomato sauce, pasta, frozen peas, cheese blocks and shredded cheese, bread rolls, bacon, chicken tenders, cans of tuna, yoghurt, juice, laundry powder, dishwashing liquid, fabric conditioner, sponges and bin bags.

The Woolworths CEO Brad Banducci said:

Food inflation in Australia began to increase towards the end of last year following many years of low inflation. Initially it affected mostly meat and imported products, but has since grown to impact almost every category.

Most recently, we have seen material inflation in vegetables given the very poor growing season on the Eastern Seaboard, due to the rain, high humidity and low light levels – hence what you may see on cucumbers, capsicums and lettuces amongst others.

Food inflation isn’t the only factor that the supermarket is having to deal with. The company will now also have a higher wage bill as it enacts wage increases. Higher costs could reduce profitability, which in turn may have (or already has had) an impact on the Woolworths share price.

Wage increase

As reported by The Australian, around 145,000 Woolworths staff are covered by the Fair Work Commission’s decision to increase the minimum wage by 5.2% and the award rate by 4.6%.

Woolworths will be passing on a $40 a week pay rise. A spokesman from Woolworths was quoted by the newspaper, who said:

Following today’s Fair Work decision, we will be passing on the annual pay increases under the modern award to our hourly-paid Woolworths Supermarket, Metro and Big W retail workers from July and will review for our salaried retail team members.

We have previously said we support an increase in team member wages that keep pace with underlying cost-of-living increases and are committed to doing the right thing.

Broker unconvinced

The broker Macquarie was not a fan of these two developments – its Woolworths share price target is now $36.40. However, this still implies a possible upside of around 10%.

Macquarie rates Woolworths as neutral. The Australian reported that Macquarie analyst Ross Curran said:

We note that supermarkets often struggle to take margin during economic disruption.

We are at the bottom of consensus for FY23 and FY24.

Based on Macquarie estimates, the Woolworths share price is valued at 28 times FY22’s estimated earnings with a possible grossed-up dividend yield of 3.6%.

The post What’s dragging the Woolworths share price lower today? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Macquarie Group Limited. 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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