The Woolworths Limited (ASX: WOW) share price tumbled as low as $20.30 in early July 2016 as many investors sold out in fear the share price was headed even lower.
That was a mistake.
It was clear that management were cutting costs and slashing margins, jettisoning the loss-making Masters hardware concept and in August, announced the sale of its petrol stations.
As I wrote in mid-July, at the price of around $22, investors might want to start dipping their toe in as good news finally began to come through. The share price is now above $25 and with further improvements in its core supermarkets business, could head even higher.
For the first time in 30 quarters (seven plus years), Woolworths has beaten arch-rival Coles – owned by Wesfarmers Ltd (ASX: WES) – when it comes to same-store-sales (SSS) growth in the core food and liquor segment. For the first half of the 2017 financial year (FY17), Coles saw SSS growth fall to 0.9%, while Woolworths reported 1.9% SSS growth as the chart below shows.
And investors can forget about the dramatic plunge in profit margins – Woolworths' earnings before interest and tax (EBIT) margins of ~8% in 2014/15 were way too high. Coles' margins were consistently just under 5%. Add in much lower margins for the budget chains of IGA and Aldi, and there was no way Woolworths could maintain its leading market share without cutting prices.
Problem child
Of course, Woolworths still has the problem child of Big W, which continues to reporting falling revenues and declining SSS growth – negative 6.3% in the last quarter, and -5.7% in the first quarter of FY17.
But Big W is a minor part of the large Woolworths operation. The company has initiated a strategic review of Big W, and there are media reports that a high-profile CEO with experience at retailers Premier Investments Limited (ASX: PMV), Pacific Brands Limited and David Jones could be appointed boss, or that BIG W could be sold to someone like Premier Investments.
Either way, that should be another positive step forward. Coles has already shown that it could turn around Kmart, so there's no reason Woolworths can't improve Big W's performance.
Foolish takeaway
Woolworths' fall from grace and its subsequent steps on the road to recovery are another example of why it pays to invest for the long term in quality businesses – and not jump in and out on short-term performance.
