Shares of Woolworths Limited (ASX: WOW) have been slammed this morning following the release of the supermarket behemoth's interim earnings report. Early in the session, more than $4 billion was wiped from the company's market value with the stock touching a low of $30.61 – a loss of 9.8% per share.
Profit downgrade
Once again, it was Woolworths' embattled Masters Home Improvement chain that weighed on overall earnings. Although the business recognised a 28.5% increase in sales during the period, it continued to cut into Woolworths' bottom line with its loss widening to $103.2 million from a $64.4 million loss in the prior corresponding period. Together with a $103.7 million provision for transformation costs of its BIG W business, Woolworths reported a 3.1% decline in first-half net profit after tax (NPAT) to $1.28 billion.
Unfortunately, management didn't provide much scope for improvement in the second half with investment in its Australian supermarkets division set to weigh on full-year net earnings. While it had previously forecast earnings to grow between 4% and 7%, management now expects its full-year net profit to be "towards the lower end of the current analyst NPAT forecast growth range", which currently sits between 1.8% and 6.6%.
In an effort to compete with Wesfarmers Ltd's (ASX: WES) booming Bunnings business, Woolworths is desperate to strengthen its Masters chain. However, the company has now accumulated more than $500 million in losses, while Woolworths continuously pushes back the timeframe in which it says it will break-even on the investment. As such, investors are left to wonder just how much more money will be pumped into the struggling business.
Should you buy Woolworths?
Investors are justifiably concerned about the issues facing Woolworths in the near-term, but it appears they're neglecting the company's long-term prospects. Over the last two decades, Woolworths has handily outperformed the benchmark S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO), and I expect that trend will continue in the years to come.
