Shares in Woolworths Limited (ASX: WOW) have disappointed hugely in 2015. They are down 12% year-to-date, which is well behind the 2% gain made by the ASX. And, looking ahead, many investors are pessimistic regarding the company's future prospects, as increased competition from the likes of Aldi and Costco make Woolworths' plight appear to be a challenging one.
However, I'm bullish on the company's prospects and believe that now is the right time to buy it for these three reasons.
Stronger-than-expected performance
While the Aussie supermarket sector is set to experience a challenging period, Woolworths' performance may be a whole lot better than is currently being expected. That's because it continues to have an advantage over relatively new entrants to the sector, with a super-efficient supply chain and enviable locations providing Woolworths with a distinct advantage over its rivals.
Furthermore, Woolworths' rival, Wesfarmers, has posted much stronger growth than Woolworths in recent months. In fact, Wesfarmers' brand, Coles, has posted relatively consistent like-for-like sales growth over the last year, while Woolworths' equivalent figures have been disappointing. As such, it appears as though management at Woolworths may be at least partly to blame for its disappointing performance, rather than it being all down to a more competitive sector.
Therefore, a shift in strategy that includes around $250m in cost savings in each of the next two years, a renewed focus on groceries rather than merchandising, and increased refurbishment to improve the appearance of its stores could deliver better-than-expected sales and profitability over the medium term.
Interest rate fall
Clearly, the outlook for the Aussie economy is rather uncertain. However, the retail sector could get a boon from an interest rate that is likely to keep on falling. That's because, while there is the risk of a housing bubble, inflation remains manageable at its current level even if monetary policy becomes looser.
This should have a positive impact on consumer spending levels, with credit being cheaper, and also on business confidence, too. In fact, debt servicing costs should fall and create greater profitability across the country, which may mean that consumers' increased price consciousness does not snowball at quite the rate that many investors are expecting. As a result, the view that Woolworths is too expensive by shoppers may stabilise and mean that margins in the sector are not squeezed as tightly as anticipated.
Income potential
A lower interest rate is also likely to mean greater interest in high yielding stocks with excellent track records of dividend growth. On this front, Woolworths has huge appeal, with it yielding 5.1% (fully franked) and also having increased dividends per share at an annualised rate of 11.6% during the last ten years. Furthermore, such a high yield indicates good value, too, with the ASX currently yielding 4.4%.
