Woolworths Group Ltd (ASX: WOW) shares have attracted plenty of attention this year as investors look for signs of a sustained recovery.
And on Wednesday we'll get another opportunity to see how that recovery is progressing.
The supermarket giant is preparing to release its first-quarter FY27 sales update, which could provide some important clues about its performance heading into Christmas.
With Woolworths shares trading around $40.60 on Tuesday, would I buy before the announcement?
Here's what I think.
What can we expect on Wednesday?
I think there's good reason to be optimistic about Woolworths' upcoming sales figures.
The company has been working hard to rebuild its relationship with customers through more competitive prices, better product availability, and improvements to the shopping experience.
And its recent results suggest these efforts are gaining traction. In the fourth quarter of FY26, Australian Food sales increased 5.5%, which was a significant improvement on the 2.1% growth recorded back in the first quarter.
Comparable sales growth also reached 4.7%, suggesting customers were spending more across its existing supermarket network.
Analysts are expecting that momentum to continue. According to UBS, it expects Woolworths to report first-quarter group sales of approximately $19.3 billion, representing growth of 4.3%.
That is also broadly consistent with the market consensus sales estimate of approximately $19.3 billion.
I think a result around these expectations would be encouraging, especially if it shows Woolworths continuing to win back customers.
I'll also be interested in management's commentary on trading conditions and whether its sales improvement is being achieved without putting too much pressure on profit margins.
Why I'm optimistic about the recovery
What I like about Woolworths is that there's still room for its performance to improve.
The business has spent considerable time addressing operational problems, and I think we're beginning to see some benefits.
Its Australian Food division delivered an 8.5% increase in earnings before interest and tax during FY26, although the comparison benefited from disruptions in the previous year.
Meanwhile, its online business continues to grow strongly, with Australian Food ecommerce sales increasing 18.6% in FY26.
I think Woolworths has an opportunity to build on this progress by improving efficiency, strengthening customer loyalty, and making shopping more convenient.
There is also considerable scope for relatively modest improvements in operating margins to support earnings growth, given the enormous scale of its supermarket operations.
Are Woolworths shares good value?
At approximately $40.60, Woolworths shares aren't an obvious bargain.
According to CommSec consensus estimates, the company is expected to generate earnings per share (EPS) of $1.49 in FY27, rising to $1.60 in FY28 and $1.75 in FY29.
That puts the shares on around 27 times forecast FY27 earnings, falling to approximately 23 times FY29 earnings.
I think that's a reasonable price to pay if Woolworths can continue improving its profitability over the coming years.
There is also the potential for growing dividends. Analysts expect dividends of $1.12 per share in FY27, increasing to $1.29 by FY29.
That would lift the potential dividend yield from approximately 2.8% to 3.2%, based on today's share price.
Of course, the company will need to manage competition, cost pressures, and changing consumer behaviour to deliver those expectations.
Foolish takeaway
I would be happy buying Woolworths shares ahead of Wednesday's update. I think the business is heading in the right direction, and another encouraging sales result could reinforce confidence in its recovery.
There may be some short-term volatility if the figures disappoint, especially given the current valuation. But I'm optimistic about where Woolworths could be in a few years as its operational improvements translate into stronger earnings.
The post Are Woolworths shares worth buying before Wednesday's big update? appeared first on The Motley Fool Australia.
Motley Fool contributor Grace Alvino has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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