Supermarket duopoly Woolworths and Coles delivered stellar quarterly sales figures this week on the back of the panic-buying that marked the early stages of the covid-19 pandemic.

Woolworths sales grew more than 10 per cent to $16.5 billion in the first quarter, as Australians stocked up on toilet paper, pasta, flour, liquor and household cleaners.

Coles booked unprecedented sales growth of 13.1 per cent over the same period, as sales revenue ballooned to $8.23 billion.

As a comparison, the successful 2019 Christmas season yielded second-quarter comparative sales growth of 3.6 per cent across Coles’ supermarket network. But April figures for both grocery retailers indicate the sales uplift is only temporary, as they revert to pre-coronavirus levels. 

Coles chief executive Steve Cain said shoppers were packing their baskets with more food but shopping less, meaning less convenience and impulse products.

Woolworths chief executive Brad Banducci also indicated food sales had pulled back to around 5 per cent in April, expecting this to level out at around 9 per cent for the June quarter.

Coles Group (ASX: COL)

Morningstar Rating: 2-star | Economic Moat: None | Price-to-Fair Value: 1.19

Coles remains Morningstar's top pick among Australian consumer staples, despite elevated share prices across the two largest incumbents.

"Longer term, our absolute food sales estimates are unchanged," says Morningstar equity research director Johannes Faul.

"We predict the share of meals consumed at home to fall to pre-COVID-19 crisis levels by fiscal 2024, from when we maintain our forecast of Woolworths' absolute Australian and New Zealand supermarket sales."

He maintains his outlook for flat earnings before interest and tax margins of around 4 per cent, far below those enjoyed when they existed as a duopoly.

This is largely due to competition from cut-price German grocer Aldi and online from Amazon. This is forcing Australia's supermarket giants to compete more aggressively on price, impeding any meaningful margin improvement.

The sales gains of the first quarter this year are also expected to be offset by higher costs due to the company’s extra COVID-19 investments.

"It's clear that large additions to the workforce and other COVID-19-related costs are chewing up most of the operating leverage otherwise to be expected," Faul says.

Woolworths Group (ASX: WOW)

Morningstar Rating: 1-star | Economic Moat: None | Price-to-Fair Value: 1.30

Woolworths will experience the same pressures. Management estimates the cost of dealing with health and security concerns will range between $220 million and $275 million in the fourth quarter of fiscal 2020 alone, with a similar pro rata amount spent in the month of March.

"We expect these costs to eliminate all benefits of the incremental sales resulting from consumer stockpiling, more eating at home, and greater spending on hygiene," Faul says.
At the midpoint, he estimates these costs at $330 million in fiscal 2020, compared with an estimated virus-related sales uplift of about $338 million.

As with Coles, Faul's outlook for Woolworths' absolute food sales through to fiscal 2024 hasn't been boosted by the recent bounce in sales.

"Our long-term outlook on the profitability of Woolworths' businesses is also unchanged," he says.