Woolworths Group Ltd (ASX: WOW) shares are a very intriguing potential investment opportunity in the current economic climate.
The decision by the US to implement tariffs on most goods from most countries has added a lot of uncertainty to the overall situation.
However, in my view, it's certain that people need to continue eating. Woolworths is well-placed to continue to provide the service that it does.
Having said that, let's get into the pros and cons regarding Woolworths shares.
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Pros of the supermarket stock
As I just indicated, I think demand for Woolworths' supermarket products will stay strong in the coming period.
Despite the headwind of the strike by distribution centre staff last year, the Australian food segment grew sales by 2.7% to $26.7 billion in the first half of FY25. I'm expecting further growth in the second half of FY25 and in FY26.
The business is doing particularly well at capturing growing customer interest in digital shopping. Woolworths reported total group e-commerce sales growth of 18.3% to $4.68 billion in HY25. E-commerce sales accounted for 13.9% of total sales in HY25, up from 12.2% in HY24. Digital sales is one advantage that Woolworths has over a competitor like Aldi, which doesn't offer online grocery shopping.
One more positive I'll point to is that the company has a number of segments which provide diversification and potential growth avenues. Other notable businesses include its food supply business to other businesses (such as cafes and restaurants), its New Zealand food business, Petstock and its media everyday rewards and services division.
According to the forecasts on Commsec, the business is trading at 22x FY25's estimated earnings, with a potential grossed-up dividend yield of 4.8%, including franking credits. Those are appealing investor metrics, in my opinion.
The final positive I'll note is that the ACCC supermarket inquiry's final report did not result in any particularly painful punishment for Woolworths, which removed a cloud hanging over the business.
Cons about Woolworths shares
One of the most recent negatives for the business was the industrial action by workers in its supply chain. It said the impact of those 17 days cost an estimated $240 million in sales and $95 million of operating profit (EBIT). Not only was this a painful hit to the company's financials, but it also pushed some customers to other retailers such as Coles Group Ltd (ASX: COL).
Another factor worth noting is that Woolworths is already a very large business and it becomes increasingly difficult for the company to grow at a fast pace as it gets bigger. In the first seven weeks of FY25, the business reported its sales grew by 3.3%. That's still a solid growth rate though, in my eyes.
The business has not fallen very far in the last few weeks, largely thanks to its defensive earnings, in my opinion. There are other ASX stocks that have fallen much further, such GQQ Partners Inc (ASX: GQG) and Accent Group Ltd (ASX: AX1) that could be smarter contrarian buys. Defensive shares are helpful against declines, but the beaten-up stocks could be the right opportunities during the market sell-off, making them more attractive than Woolworths shares.
But, this is still a compelling time to look at a defensive business, it just may not be the best opportunity.
