IBISWorld's market research report on the supermarkets and grocery stores industry in Australia released last month showed that Woolworths Limited (ASX: WOW) has gained market share from both major rival Wesfarmers Ltd (ASX: WES) and other competitors for the first time in years.
Woolworths now accounts for 36.8% of the industry compared to the Wesfarmers owned Coles's 30.9%.
In late October, Woolworths released a solid set of sales numbers for the September 2017 quarter which has spurred a small 3% rally in its share price.
Revised strategy
Following the disaster of Woolworths' entrance into the home improvement market via Masters, the company has adjusted its strategic focus back towards its traditional strength in food and drink.
For the September 2017 quarter, sales for the Australian Food division rose 4.7% to $9.63 billion whilst the Endeavour Drinks division saw a 3.8% rise to $2.05 billion.
Sales growth in the Australian Food division was particularly impressive given the ongoing price deflation in the fruit and vegetables space.
The company's New Zealand Food division also saw solid growth of 3.2% at constant currency.
In a sign of an escalating trend, online sales in Australian and New Zealand Food saw double digit growth aided by the roll out of Pick up at all Woolworths and Countdown supermarkets.
Troubled department store chain Big W also saw a turnaround in fortunes, posting a 2.5% increase in quarterly sales to $890 million. However, management does not see a return to profitability in the near term after Big W lost $150 million in FY 2017 and was the main culprit for the overall group's 4.9% decline in EBIT from continuing operations.
Foolish takeaway
While this was undoubtedly a solid quarter of sales numbers, the company did not provide any information on its margins.
Despite sales increasing by 4.5% in FY 2017, the Australian Food division saw a 2.4% decline in EBIT due to EBIT to sales margins falling from 4.72% to 4.41%. With increasing market share and growing sales there is a reasonable bull thesis for Woolworths, but the degree to which market share and sales have increased at the expense of margins will be crucial moving forward.
The stock currently trades at an above average market multiple of approximately 20 times forward earnings which does seem a tad stretched for an entry point for a defensive stock.
