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Woolworths Keeps Eyes On The Prize

Australia | Nov 07 2022

This story features WOOLWORTHS GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: WOW

Despite a difficult first quarter, analysts largely expect normalising consumer trends and ongoing inflation to benefit Woolworths in the coming year. 

-Woolworths delivers disappointing like-for-like sales in its first quarter of FY23
-Tough comparables in the previous year weigh on performance
-Inflation rises to 7.3% in the quarter, and remains key to performance in coming quarters

By Danielle Austin

With Woolworths Group’s ((WOW)) comparable sales underperforming those of key competitor Coles Group ((COL)), the retailer's latest update largely underwhelmed the market.

As highlighted by Ord Minnett (Lighten, target price $30.00), the retailer reported a like-for-like sales decline of -1.1% in the first quarter, while Coles delivered sales growth of 2.1%. According to the broker, results imply Woolworths has lost some ground to competitors, and it expects the company faces several quarters of market share declines. Thus far, the broker finds Woolworths' reaction to market share loss to be rational, noting the company has avoided price changes to retain customers. 

Credit Suisse (Neutral, target price $33.01) expects market assumptions for share retention were too optimistic, particularly given the retailer was cycling off strong market share gains in the previous comparable period. Woolworths made an impressive 60 basis point share gain in the first quarter of FY22 as a result of east coast lockdowns, and now appears to be ceding some ground to peers as consumer trends normalise, according to the broker. 

Inflation remains key to retailers outlook 

Rising inflation remains a key risk to staple retailers like Woolworths, which reported inflation of 7.3% for its domestic food operations in the first quarter. The retailer aims to remain competitive on price in a bid to retain value-chasing customers. 

Macquarie (Neutral, target price $35.50) finds staple retailers a relatively defensive choice for investors amid declining discretionary spend. Although Woolworths reported a -13% decline in items per basket in its latest update, the broker expects this trend to improve. 

Similarly, Citi (Buy, target price $39.50) expects a return to more predictable spending patterns to benefit Woolworths, allowing the company to better manage costs. Despite appearing to lose some market share to Coles in the quarter, Citi highlighted that Woolworths remains ahead of its competitor on a four-year stack basis, at 20% sales growth compared to 13%. 

Both UBS (Neutral, target price $34.50) and Morgans (Hold, target price $34.10) found the first quarter result weaker than expected, with the former noting the increase in food inflation was insufficient to offset comparable metrics. Morgans noted the retailer’s New Zealand food operations reported a -3.3% like-for-like sales decline, and Woolworths has guided to first half earnings of NZ$100-130 for the segment, reflecting a -40% decline on the previous comparable period. 

Outside of database coverage, both Jarden (Overweight, target price $35.50) and Goldman Sachs (Buy, target price $41.70) pointed out that despite the quarter being disappointing the company’s Big W brand outperformed. Jarden found company commentary upbeat despite negatives, with the company pointing to improving trends in October, on-track cost out initiatives and no major covid costs as positive signifiers. The broker anticipates Woolworths will outperform over the coming year, assisted by rising inflation and share momentum.

[Morgan Stanley has this morning initiated (or re-initiated) coverage of Woolworths, Coles and Endeavour Group, all with Underweight ratings. The supermarket ratings are premised on the impact of a weaker consumer trading down, margin pressure as the industry invests in price and the inflationary pressure on costs. The broker's earnings estimates are below consensus. Morgan Stanley nevertheless prefers Woolworths out of the three. Target price $28.50.]

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