AU earnings: Woolworths - anticipating growth amidst challenges

Woolworths Group reports full-year results on the 23rd of August. In this week’s bonus edition of Investor Spotlight, we discuss what to expect from this year’s results, provide an overview of what analysts say about the stock, and analyse the retailer's stock.

Anticipated growth in a challenging retail climate

Woolworths is forecast to post growth on both its top and bottom lines for the financial year 2023 (FY23). Data compiled by Reuters suggest analysts are projecting a 5.3% rise in revenues for the full year, with net income expected to increase by nearly 15%.

Unlike many businesses, Woolworths has gained from the elevated inflation environment in Australia. The rising cost of food and consumers' resilience to absorb these costs have enhanced Woolworth's food business. With food price inflation predicted to stay relatively high, investors foresee ongoing support for the retailer's revenues.

Easing business costs as operating conditions return to normal post-COVID lockdowns could strengthen Woolworths’ bottom line. Although the cost of goods sold surged in 2023, the pace of these increases is likely to stabilise moving forward as pressures from logistics and input costs decrease. However, rising Australian wages may present challenges.

Risks and concerns in other business segments

There remain uncertainties around Woolworths' other business segments. Declines in spending on apparel and other goods might negatively affect profits for the Big W brand. With likely moderation in household spending in the year ahead, this dynamic could dampen Woolworth's profit outlook.

Importantly, as a cherished defensive stock, investors anticipate a hike in Woolworths’ payout this year. According to FNArena, the full-year dividend is projected to climb 12.1% to $1.03 in FY23, with a further 7% increase anticipated in FY24.

FNArena's market consensus forecast chart

The markets are neutral on Woolworths’ outlook

Woolworths' share price has run up significantly in 2023. Although it remains off its highs reached in the COVID-19 "everything rally", the valuation is historically elevated. As a result, the analyst community is mixed on the stock's attractiveness.

Currently, Woolworths' shares boast a consensus hold rating, with two recommending a strong buy and six a buy, but four suggesting a hold and another four prescribing a sell. The consensus price target roughly aligns with the present price of $39.40 per share.

Earnings outlook chart

Meanwhile, IG clients are bullish toward Woolworths’ shares. As of the 16th of August, 68% of clients are long and 32% are short. Although not at extremes, this could be a contrarian signal and point to a market that has priced in a lot of good news in the stock. However, only a small number of clients possess an open position in the trade.

IG client sentiment chart

Risk-reward for Woolworths shares appears unattractive

Having escalated throughout 2023, Woolworths shares appear richly valued. With a trailing price-to-earnings ratio of a robust 27.2 times, the shares are higher than peers.

Investors seek Woolworths for its defensive and income-paying qualities. The stock has been a solid bulwark this year; however, the stock's elevated price has meant the dividend is growing less attractive. The current dividend yield is 2.6%, with FNArena data suggesting it should lift modestly to 2.9% in FY24.

While on a risk-adjusted basis, this is relatively attractive compared to other ASX-listed companies, deposit rates and bond yields above 3% mean safer income can be found in other assets.

Woolworths price to earnings chart

Historical earnings chart

Woolworths technical analysis

The technical indicators are signalling downside momentum for Woolworths' shares. The weekly Relative Strength Index (RSI) is grinding lower, while short-term trendline support has recently broken down. The stock is sold on rallies above $40, with support potentially at the 200-week moving average and the last higher low at $37.20. In the bigger picture, buyers have emerged below $34 per share.

Woolworths weekly chart