Why this broker sees ‘downside risks’ to the current Woolworths share price

A child pulls a very sad crying face sitting in the child seat of a supermarket trolley in a supermarket aisle lined with grocery items.

Image source: Getty Images

The Woolworths Group Ltd (ASX: WOW) share price has struggled in recent months, falling 14% from its August peak.

The stock reached a near-four-month high of $39.61 shortly before the supermarket giant released its financial year 2022 earnings. Today, the Woolworths share price is trading at $33.92, having slipped 1.08% this morning.

For comparison, the S&P/ASX 200 Index (ASX: XJO) is up 0.15% at the time of writing. Meanwhile, the company’s home sector – the S&P/ASX 200 Consumer Staples Index (ASX: XSJ) – has slipped 1.25%.

Could the stock’s recent tumble present a buying opportunity? Ord Minnett senior client advisor Tony Paterno doesn’t think so.

Let’s take a closer look at why the expert is bearish on the ASX 200 supermarket favourite.

Could this weigh on the Woolworths share price?

The future looks cloudy for the Woolworths share price as one top broker tips the stock as a sell.

Paterno noted Ord Minnett continues to see “downside risks” to the supermarket operator’s future earnings and multiples, as per The Bull. The expert continued:

We have reduced our earnings per share forecasts between 3% and 4%, primarily due to challenges in the New Zealand business.

The company’s New Zealand food segment reported an 8.1% drop in sales over the first quarter of financial year 2023 compared to the same period of the prior year, bringing in just $1.8 billion.

Much of that was due to the cycling of a major COVID-19 lockdown in Auckland in the prior period. However, CEO Brad Banducci noted numerous other impacts, saying:

In New Zealand Food, we are seeing signs of stabilisation in the trading environment; however, given the combination of lower sales and materially higher wage inflation, we currently expect [first half earnings before interest and tax] of NZ$100 — $130 million.

For comparison, the segment brought in NZ$200 million in the first half of last financial year. The company expects the upcoming second half to be a better one.

Meanwhile, not all brokers are bearish.

Goldman Sachs believes Woolworths shares are a buy, slapping the stock with a $41.70 price target – representing a potential 23% upside. It recently said:

Despite a noisy and softer [first quarter], we remain confident that [Woolworths] is the superior operator within [Australian] supermarkets.

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