Even amid inflation, we all have to buy food. So why is the Woolworths share price struggling?

The Woolworths Group Ltd (ASX: WOW) share price has been going backwards despite everything that’s happening with food inflation.

Since mid-August, the Woolworths share price has dropped by approximately 15%.

This comes at a time when food prices on the shelves have been going up. Shouldn’t that lead to higher revenue and net profit after tax (NPAT) for Woolworths? There may be more to it than that.

Expert suggests it was a problem with the outlook

Brad Potter, Tyndall AM’s Head of Australian Equities, said on a podcast published on Livewire that businesses in the consumer staples space like Woolworths, Coles Group Ltd (ASX: COL) and Endeavour Group Ltd (ASX: EDV) went into reporting season (in August) with high valuations.

While results “met expectations”, the problem was that their “outlook statements didn’t, and therefore they all fell significantly on result day and on the days subsequent”.

Potter pointed out that cost growth is hurting the industry. The implication was that this could then be having an impact on the Woolworths share price.

What did Woolworths say?

The company said the start of FY23 has been clouded by the cycling of the COVID outbreak at the beginning of FY22 in its Australian food business. This significantly impacted the most populous states of NSW and Victoria. Total food sales in the first eight weeks of FY23 were down 0.5% year over year.

Operating conditions in the New Zealand food division remain “challenging”. Total sales were down 1% on the prior year in the first eight weeks. New Zealand food’s earnings before interest and tax (EBIT) is expected to be “materially below” the prior year, with things like the supply chain and team absenteeism still being impacted.

Woolworths will spend significantly on areas such as its supply chain transformation, store renewals, e-commerce, and digital investments.

Summarising the situation, Woolworths CEO Brad Banducci said:

We expect the trading environment to remain volatile and challenging due to endemic COVID disruptions, ongoing supply chain challenges, higher costs across our business and cost-of-living pressures for our customers.

However, we are increasingly more agile and purposeful in responding to these challenges and are focused on improving our underlying operating performance across all aspects of our value chain after three years of disruption.

Is the Woolworths share price an opportunity or not?

Experts are mixed on whether the business is fully priced or worth buying.

Talking to Matthew Kidman on Livewire’s ‘buy hold sell’, First Sentier’s David Wilson called it a buy, suggesting that the company has regained its “mojo” and that it’s doing a number of positive things. Those improvements include reducing costs, growing market share and that it’s “really well placed from an online point of view”.

However, Michelle Lopez from abrdn called the Woolworths share price a hold. She said:

It’s a hold. This is a really well-run business. It’s defensive. We still feel food inflation is going to continue to play out, but it’s fully valued. And again, it’s one of those defensive names that is not a bad place to hide given what we’re about to come into. But the valuation is a hold.

The post Even amid inflation, we all have to buy food. So why is the Woolworths share price struggling? appeared first on The Motley Fool Australia.

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More reading

• Have ASX 200 retail shares been worth buying so far in FY23?
• Down 9% in a month, could the Woolworths share price turn around in October?
• Here’s why experts rate these blue chip ASX 200 shares as buys
• September was a shocker for the ASX 200, but how did the Woolworths share price stack up?
• Woolworths shares: Buy, hold, or fold?

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 positions in and has recommended COLESGROUP DEF SET. 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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