Woolworths Group Ltd (ASX: WOW)

Woolworths Group Ltd is an ASX listed operator of retail chains, including supermarkets under the Woolworths banner.

Recommendation Rationale – SELL at AUD 34.67

• Trading Around Resistance: WOW’s share price has surpassed the ‘Resistance 1’ level recommended on 27 May 2024 (previous Buy position); thus, share price retracement can be expected.
• Increase in CODB: The Cost of doing business (CODB) expanded by 81 bps to 22.5% in H1 FY24 (21.7% in H1 FY23) due to increase in team wages, and cost inflation.
• Competitive Market: The retail industry, particularly groceries and consumer goods, is highly competitive. Woolworths faces competition from other major supermarket chains. Therefore, changes in consumer preferences or aggressive pricing strategies by competitors could affect Woolworths' market share and profitability.
• Decline in Customer Score: During Q3 FY24, group voice of Customer NPS declined by 4 points from March 2023 to the value of 43. Besides, Brad Banducci commented in Q3 FY24 results that customers are facing cost-of-living pressure and expect conditions to be challenging for the next 12 months.

WOW’s Daily Price Chart

 (Source: REFINITIV; Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY Jun'25E) (Illustrative)

WOW is expected to trade at a premium based on the Company’s productivity plans, and operational growth (3.3% and 2.2% YoY increase in EBIT and interim dividend in H1 FY24, respectively).  The following peers have been considered for conducting valuation: Coles Group Ltd (ASX: COL), Endeavour Group Ltd (ASX: EDV), and Bega Cheese Ltd (ASX: BGA).

Given its current trading levels, recent rally in the share price, and risks associated, it can face resistance at the current levels. Hence, a ‘Sell’ recommendation is given on the stock at the current market price of AUD 34.67, at 12:45 AM AEST, as of 25 July 2024.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical issues prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: Past performance is neither an indicator nor a guarantee of future performance.

Note 2: The reference date for all price data, currency, technical indicators, support, and resistance levels is 25 July 2024. The reference data in this report has been partly sourced from REFINITIV.

Note 3: Investment decisions should be made depending on an individual's appetite for upside potential, risks, holding duration, and any previous holdings. An 'Exit' from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above.

Note 4: Dividend Yield may vary as per the stock price movement. 

Technical Indicators Defined: -

Support: A level at which the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level at which the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: In general, it is a level to protect further losses in case of any unfavourable movement in the stock prices.