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Woolies' latest sales report shows the company benefited greatly from the government stimulus payments last year. The absence of those payments in the current period has made the sales growth look slightly weaker. Scratching beneath the surface reveals that is not the case.

Most of Woolworths' revenue is generated from the more defensive end of the retail spectrum in food and liquor, both in Australia and New Zealand. The impressive trend of sales growth in stores that have been open for more than a year demonstrates the company's mastery of the retail industry. In the quarter ending on December 31, 2009, Woolies stores increased same store sales by 3.8 per cent while total food and liquor sales lifted by 5.9 per cent.

A new aspect to Woolworths this year will be the commencement of its entry into the hardware and home improvement market. After acquiring the Danks hardware business last year, Woolworths will use it as a launching pad to build its own store network of 150 sites within five years. The move into hardware has certainly spooked the largest player, Bunnings (owned by Wesfarmers), into ratcheting up its store building program. In NSW alone, Bunnings plans to build 12 new stores over the next three years. Metcash's takeover of Mitre 10 will add a further dimension of change to the industry over the coming years.

Woolworths has an opportunity to extend its lead in the liquor sector as well. Several pub groups have been looking to offload assets in the past year and Woolworths will undoubtedly be running the ruler over a number of them.

New information on the success of the frequent flyer program with Qantas hints at the increasing sophistication of the Woolworths mothership. The company is about to link up its 2 millionth Everyday Rewards card to the Qantas Frequent Flyer program. Woolies has about 4.9 million loyalty card holders. The program will undoubtedly be extended to other areas of Woolworths' business.

The outlook Woolworths is a bellwether stock on the health of the Australian consumer. Considering the robust state of consumer confidence and the relatively low level of interest rates and unemployment in Australia, consumers should sustain a steady rate of growth in spending. While Woolworths is clearly positioned to capture a big chunk of that, more importantly, it can transform that sales growth into profit growth.

The company repeated its outlook for profit growth to be between 8 per cent and 11 per cent for the 2010 financial year.

Price For the past year, the market has looked more closely at the revival progress of Woolworths' main competitor, Coles. The latter proved to be a better investment in 2009 because of its recovery progress. In the past 12 months, Woolworths' share price has remained steady around its current price of about $27.

Worth buying? The majority of Woolworths' revenue and earnings is derived from staple consumer items, not discretionary spending. As such, it will be less susceptible to rising interest rates this year.

The premium valuation rating attached to Woolworths' share price relative to Wesfarmers has dissipated to the extent that Woolworths now looks the cheaper bet of the two.

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