It comes as no real surprise that Woolworth’s shares have dropped by 3.6% (or $1.08) since announcing its full year profit report on Monday. Although the results came in pretty much as expected, they didn’t allude to too many upsides as sales momentum in the business slows. Further, the stock remains expensive, trading on a multiple of 20.6 times FY19 earnings.

Woolworths has been a great recovery stock. From a low of $20.30 in June 2016, it hit a high of $31.48 in mid-July, as the market bought the transformation story. This saw the closure of the Masters homeware business, the hiring of Brad Banducci as CEO, a refresh of Australian supermarkets such that they are competing vigorously with Coles and Aldi, the pursuit of an IPO or sale of the petrol business and progress (albeit slow) to turnaround the disastrous BigW division.

Woolworths Share Price – August 2013 to August 2018

Source: Nabtrade

But the transformation is nearing completion and shareholders are increasingly asking “what’s next?”. The answer they are seeing is a business competing in a mature, low growth market with little on the horizon to excite.

Net profit after tax in FY18 grew by 12.5% to $1.72bn on top line sales growth of 3.4% to $56.7bn. The Australian supermarket business starred, growing EBIT by 9.6% to $1.75bn or 64% of the whole group. This came on the back of an increase in its key EBIT to sales ratio by  0.23% to 4.7% (for every dollar spent at a Woolworths supermarket, the company makes 4.7 cents), with improvements in stock loss, meat operating model, product mix, and promotional effectiveness offsetting higher operating costs.

However, sales momentum in Australian supermarkets slowed. In the key metric that measures sales growth across comparable stores, 4th quarter sales increased by 3.1%, compared to the 4th quarter in FY17. This was down from the full-year growth rate of 4.3% and suggest that Woolworth’s recent lead over Coles is narrowing.

Comparable Stores Sales Growth Food (Easter Adjusted) – 17/18

Moreover, Woolworths warned that for the first seven trading weeks of FY19, comparable store sales growth had slipped to 1.3%. It blamed the impact of the plastic bag fiasco, the success of the Coles “miniatures” initiative, fresh food deflation and the cycling of a prior year initiative for the performance.

The Endeavour Drinks business, which includes Dan Murphy’s and BWS, grew EBIT by 2.8% to $516m (19% of the group total). Sales growth of 4.5% was held back by a reduced EBIT to sales ratio (down 11bp) as the costs of doing business increased.

The contribution from the NZ division (Countdown) fell by 8.2% to 284m, while losses continued with BigW ( a loss of $110m). On a brighter note, comparable store sales for BigW recorded an increase in the final quarter, up 2.0%.

Shareholders will receive a final dividend of 60c per share (50c ordinary and 10c special), taking the total to 103c for FY18, up 22.6% on the 84c paid for FY17.

What do the brokers say?

The brokers are largely neutral on Woolworths, seeing it as fairly but fully valued. There are no buy recommendations. According to FN Arena, the 8 major brokers have a consensus target price of $28.47, fractionally below yesterday’s closing price of $28.54. Citi is the most bullish with a target price of $32.00, while Morgan Stanley is at the other extreme with a target of $23.00. (see table below).

They forecast earnings per share rising moderately to 138.4c per share in FY19 and then 149.9c per share in FY20. This puts Woolworths on a multiple of 20.6 times FY19 and 19.0 times FY20 earnings. The forecast dividend yield is a relatively unattractive 3.5% for FY19.

Bottom line

Shareholders can look forward to some capital management initiatives this year when the sale of the petrol business is completed. The company is also fairly bullish about WooliesX, its investment in digital, data, loyalty and the customer experience to drive sales, in particular on-line sales. It is rolling the model out to New Zealand (CountdownX).

However, it is still fundamentally a low growth business, and unless inflation picks up or competition cools off in the supermarket business, it will be challenged to lift earning.

I can’t get excited by Woolworths trading on a multiple of over 20 times. Not a buy. If you are looking to create room in your portfolio or need the cash, this is a stock to put on the sell list.