Woolworths Limited (ASX: WOW) is facing stiff competition in supermarkets, liquor & petrol, a combined business sector which made up 88% of its recent quarterly sales.
Excluding the Home Improvement business, which includes Home Timber and Hardware and Masters (both of which are in the process of being divested), Woolworths' supermarkets business accounted for 91% of revenue.
At the profit line, the dependence on supermarkets is even worse, with General Merchandise in damage limitation mode.
Unfortunately, growth from the likes of Aldi, Costco and Wesfarmers Ltd's (ASX: WES) Coles is crimping supermarket profit margins and stunting growth.
Personally, I questioned why Woolworths' management decided to sell the entire Home Improvement business over the profitable and presumably more valuable General Merchandise business (which includes Big W). Now, General Merchandising is undergoing a comprehensive review.
Is it time to sell Woolworths?
Without a Home Improvement business, I find it difficult to envisage a future in which Woolworths' share price can outperform.
Even at today's seemingly low share price the company trades at a premium price-earnings ratio to the market. An accounting gain from the sale of the Home Improvement business could be a catalyst for a share price spike, but it wouldn't outweigh the benefits of investing in another growing business (see below). Intrinsic values could pump up a few dollars, but not enough to establish a suitable margin of safety.
Therefore, if lower profit margins within the all-important supermarkets business are anticipated, the risk may still be to the downside at today's price.
Foolish takeaway
I made a mistake buying Woolworths' shares in 2015 in the hope of a turnaround play. While that could happen — although it will take a few years to come to fruition — I think recent initiatives will be of little help to the long-term growth prospects of the company.
I recently sold my shares to find other, faster-growing dividend shares.
