Woolworths Group Ltd (ASX: WOW) shares were out of form on Tuesday.
That retail giant's shares edged lower after investors gave a lukewarm response to a trading update.
The team at Goldman Sachs has been looking through the update and has given its verdict on the company's shares.
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What is Goldman saying about Woolworths shares?
Goldman was relatively pleased with the company's update, noting that a weak performance in New Zealand has been offset by a stronger than expected performance in Australia. It said:
Whilst we expect that the NZ business to take longer for a turnaround (FY26 EBIT of A$196mn, vs FY19 of A$277mn), we believe that the AU Foods business continues to show better than expected strength with a combination of better-than-market growth in sales and EBIT margin expansion. In 1H24, for AU Foods, we forecast strong sales growth of 6% and 5.1% EBIT margin (+26bps yoy). Our FY24 group EBIT forecast is A$3,335mn, +7% yoy. In contrast to COL, we forecast 1H24 Food sales +5% and EBIT margin of 4.6%, -46pct yoy, and we expect the quality gap to further expand from prior years.
What about returns?
While Goldman has trimmed its valuation slightly, it is still expecting strong returns from Woolworths shares over the next 12 months.
According to the note, the broker has retained its conviction buy rating with a new $42.30 price target (from $43.30).
Based on the current Woolworths share price of $36.19, this implies almost 17% upside for investors between now and this time next year.
But the returns won't stop there. Goldman is forecasting a fully franked 3.2% dividend yield in FY 2024.
If we add this into the equation, the total potential return stretches to a very attractive 20%. This is approximately double the historical market return.
