Key Morningstar metrics for Woolworths WOW

  • Fair Value Estimate: $28.50
  • Morningstar Rating: ★★
  • Morningstar Economic Moat Rating: Narrow
  • Morningstar Uncertainty Rating: Low

Woolworths is cutting prices at supermarkets, while operating costs are still rising ahead of sales growth. Despite sales lifting 4%, these margin crunching effects, together with one-off industrial action, saw net profit before tax collapse 21% to AUD 730 million in the first half of fiscal 2025.

Why it matters: Supermarket earnings, excluding the $95 million one-off hit from two week strikes at some distribution centers just ahead of Christmas, met our expectations. However, smaller segments didn't. We lower our fiscal 2025 earnings estimate by 7% to $1.32 per share.

  • Competition is increasing. Customers are cross-shopping more between supermarkets, seeking the best value. Low prices are the number one priority for Woolworths' customers, before health and taste considerations. Discounts are getting deeper and average shelf prices deflated slightly in the half.
  • The transformation of the New Zealand business is slowly getting traction. EBIT grew by 15%, but we had expected better. We still expect a cyclical consumer recovery and transformation efforts to lift EBIT margins to 5% in fiscal 2027, from 2% in the first half.

The bottom line: The downgrade in our near-term earnings forecast is immaterial to our fair value estimate on narrow-moat Woolworths, which remains AUD 28.50. Shares are slightly overvalued at current prices.

Between the lines: Woolworths announced a massive cost-savings program. At $400 million annualized from fiscal 2026, it could deliver an up to 12% boost to our fiscal 20256 group EBIT estimate of $3.3 billion.

  • However, we are reluctant to explicitly factor in these savings. Rather, we expect them to be offset by an increasing operating cost base and price discounting, with any replicable benefits to be competed away.
  • The program is reminiscent of Coles' Smarter Selling program to save $1 billion over four years to fiscal 2023. Coles' net profit margin of 2.6% in fiscal 2023 was virtually the same as in fiscal 2019.

Key Morningstar metrics for Coles COL

  • Fair Value Estimate: $15.50
  • Morningstar Rating: ★
  • Morningstar Economic Moat Rating: Narrow
  • Morningstar Uncertainty Rating: None

Coles saw a 2% decline in statutory net profit after tax to $576 million in the first half fiscal 2025. Operating and supply chain ramp-up costs increased, but were offset by better theft prevention. Coles stepped up while strikes plagued Woolworths, supporting supermarket sales up 4%.

Why it matters: After making considerable headway over the past twelve months, we don't expect stock loss improvements to materially offset rising costs in the second half. We anticipate a more challenging period, and forecast flat supermarket profit margins in fiscal 2025.

  • We maintain our earnings forecasts. We had expected Coles to reap the benefits of recent investments in theft prevention technology. While liquor profits missed our expectation, our downgrade of the smaller business' outlook is immaterial. Liquor accounts for less than 10% of group earnings.
  • Coles benefited from emptier shelves at Woolworths which suffered a two-week strike at some of its distribution centers. We view the additional sales and $20 million in EBIT as a one-off. Recent sales figures, suggest Coles and Woolworths are both holding onto their respective market share.

The bottom line: Our $15.50 fair value for no-moat Coles stands.

  • Shares are overvalued. We think a P/ E of 25, based on our unchanged fiscal 2025 adjusted earnings estimate of $0.82, is too expensive for a relatively low-growth, defensive yield stock. Only slightly expensive, Woolworths is more compelling.
  • We forecast a five-year earnings compound annual growth rate of 3%. Although shares in narrow-moat Woolworths are slightly overvalued, we prefer it over Coles for investors seeking exposure to the defensive food retailing sector.

Between the lines: Coles excludes ramp-up costs and provisions for its supply chain from underlying EBIT. On this basis supermarket EBIT increased by 11%. However, we treat these costs as business-as-usual expenses. On our measure, and adjusted for the strike-benefit, EBIT increased by 1%.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.