Woolworths shares are tanking after a credit rating downgrade

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Standard & Poor’s has downgraded its rating of Woolworths because of weak earnings from the supermarket group and intense competition in the market.

A short time ago Woolworths shares were down 6.8% to $20.75.

The long-term rating on Woolworths was lowered to BBB from BBB+. The short-term rating was reaffirmed at A-2.

Sales at Woolworths have been flatlining. Food and liquor sales hit $10.7 billion, a rise of just 0.4%, for the April quarter, and the normally busy Easter period was a disappointment with adjusted comparable sales falling by 0.9%.

“The downgrade reflects our view that Woolworths’ continuing weak revenue, earnings, and market share performance in its core Australian supermarket business will cause the group’s financial risk profile to sustain at levels outside tolerances for the previous BBB+ rating in the medium term,” says S&P Global Ratings credit analyst Paul Draffin.

Its discount department store subsidiary Big W recorded a material decline in revenues and the company will incur significant additional investment in prices and service levels at its Australian supermarket business.

“We consider that a turnaround in Woolworths’ core supermarket business will be heavily reliant on significant improvements to in-store execution, including service, product availability, and system upgrades, which pose execution risks and will take time to gain traction,” says Draffin.

“Furthermore, this turnaround remains heavily reliant on boosting staff morale. The competitive environment is also likely to remain intense, which will temper the potential customer response.”

However, S&P has a stable outlook for Woolworths.

“The stable outlook reflects our expectation that the group’s investment in price, service, and systems will support a stabilisation of market share and a return to satisfactory earnings growth in the next two-to-three years, despite near-term earnings and margin pressure,” says Draffin.

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