Coles Does It Better, Woolworths De-Rated

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Stark divergence in sales momentum from FY25 into FY26 highlights Coles’ superior execution, while Woolworths seems lost.

-Coles’ sales momentum accelerates in late FY25 and into FY26; Woolworths’ decelerates
-Coles executing well, Woolworths bereft of strategy
-Trend set to continue in FY26
-A Woolworths recovery expected to take time

By Greg Peel

Coles Group ((COL)) and Woolworths Group ((WOW)) reported FY25 results on consecutive days in the final week of the August reporting season. Coles shares rose some 8.5% on release, while Woolworths shares fell almost -15%.

For two companies effectively in the same game, with the same target customers, why such a divergence?

There are a couple of differences nonetheless. Woolworths is much bigger, and carries the load of the perennially underperforming Big W discount store chain. Coles does not have an equivalent to Big W but does still own a retail liquor chain (Liquorland) while Woolworths divested of its liquor businesses into Endeavour Group ((EDV)). Woolworths also has a presence in New Zealand. Coles does not.

Supermarkets are, however, the primary driver of earnings for both. The average shopper could walk into one of either and be forgiven for asking: what’s the difference? The average shopper is struggling as much with the cost of living as the next person.

Before comparing FY25 results it should be acknowledged Woolworths suffered a tough March quarter, copping costs related to extreme weather in the quarter in Queensland and northern NSW, due to airlifting essential items into stranded towns and elevated losses of stock and damage from flooding.

This came on top of the costly hit Woolworths took from industrial action in Victoria in the December quarter.

There was also the case of the battle of the promotions – insidious giveaways (based on amount spent) of items targeted at exploiting the pester-power of children.

Woolworths did not have such a promotion in FY24, but in FY25 its Minecraft giveaways were a big hit. Coles’ Pokemon promotion proved a winner in FY24, but Harry Potter flopped in FY25.

The Numbers

Coles’ FY25 group sales rose 3.6%, earnings 6.8% and profit 3.7% year on year. Woolworths’ group sales rose 3.6%, while earnings fell -12.6% and profit fell -17.1%.

Coles’ supermarket sales rose 3.7% in the March quarter, 4.8% in June and 4.9% in the first eight weeks of FY26. Woolworths’ (Australian) sales rose 3.6% in March, 3.4% in June and 2.1% in the first eight weeks.

Both supermarket chains are suffering from a -30% fall in tobacco sales due to the abundance of illegal tobacco retailers. Ex tobacco, Woolworths’ sales rose 4% in the first eight weeks of FY26, while Coles’ rose 7%.

The FY25 results for each were roughly in line with consensus forecasts. It was these first-eight-week numbers, and respective FY26 outlooks, that saw Coles shares ramping on the one hand, and Woolworths crashing.

What Coles Did Right

A solid uplift in Coles’ Supermarkets margins (up 23bp to 5.3%) was a key highlight for Morgans, driven by an improved loss (shoplifting) performance, strategic sourcing benefits, $327m in “Simplify & Save to Invest” cost savings, greater efficiency from the automated distribution centres (ADCs), and growth in Coles 360 retail media income.

Since you asked, Coles defines Coles 360 on its website thusly: Coles 360 combines the power of customer connections, media connections and partner connections to offer your brand a one-stop media solution.

These gains more than offset higher wage costs, increased D&A, and new expenses associated with operating the customer fulfilment centres (CFCs), allowing Coles to continue to invest in the customer offer.

Lower costs than expected from the implementation of the Witron (distribution centres) and Ocado (fulfilment centres) platforms were a positive, notes Ord Minnett, and company commentary suggests these major projects are driving strong improvements to its operational performance. There are likely further gains to come from these initiatives when their implementation is complete.

Coles’ NSW and Queensland ADCs are delivering improved availability, Macquarie notes (20% more so than Victoria, where an ADC is to be commissioned by 2030), which has flow-on effects on product quality in-store, and customer NPS.

Since you asked, Net Promoter Score (NPS) is a market research metric that is based on a single survey question asking respondents to rate the likelihood that they would recommend a company, product, or a service to a friend or colleague.

In addition, the Ocado CFCs continue to be scaled up, to support eCommerce growth. Macquarie suggests if capacity continues to be filled, there is material upside to Supermarket earnings.

What Woolies Did Wrong

There was limited insight into Woolworths’ FY25 performance, Macquarie notes, nor a short-term strategy to fix the performance issues. Management suggested customers “love Woolworths” based on improving NPS scores but this isn’t translating into profitable sales.

Grocery is the most contestable retail segment, Macquarie suggests, with grocers needing to win every day. Their frequency of purchase means performance can turn quickly. It’s not clear if Woolworths made mistakes and/or competition was the most disruptive factor.

Macquarie notes cross-shopping is “huge” in grocery retail (seeking best deals), particularly between Woolworths and Coles because both are omnipresent. Data suggest 31% of Woolworths customers also shop at Coles and 11% also shop at Aldi. And 38% of Coles shoppers shop at Woolworths.

Macquarie suspects Woolworths is missing this aspect of customer behaviour. Their customers are still in-store and claim they “love” Woolworths, but “cross-shopping is growing”. Equally, Macquarie suspects the percentage of Coles shoppers also shopping at Woolworths is dropping. These are subtle behavioural changes, notes Macquarie, but with material impact.

While there are no specific comparisons, all brokers suspect Woolworths lost market share to Coles in FY25.

Despite a price investment campaign launched in mid-May, Woolworths’ Australian Food comparable sales decelerated sequentially in the June quarter and in the trading update, suggesting to Morgan Stanley an ongoing customer perception problem.

Morgans notes Woolworths’ earnings were impacted by cost inflation (wage increases and higher livestock prices not fully passed through), price investment, stock loss (shoplifting) increases, and a negative sales mix from customers trading down into own brand and shopping more on promotions. Industrial action and incremental supply chain costs were also headwinds, with the earnings margin falling -80bp to 5.4%.

In an increasingly competitive retail environment, customers are prioritising value, Morgans notes, especially in non-food categories such as Pet and Baby. While sentiment appears to have stabilised, shoppers remain focused on specials and promotions.

While Woolworths’ improving NPS is encouraging, Citi suggests it’s likely to take at least another three to four quarters to get back to where it was prior to the issues in 2024 (industrial action). Earlier reports show when Woolworths’ customer satisfaction previously bottomed in 2015, it didn’t retake the lead on Coles again until the December quarter of FY17.

Woolworths has a great brand, business and opportunity, Jarden declares. However, this broker believes the business needs to get back to basics, adopting a true customer-led approach. Jarden thinks this can be done via a focus on right price, right product and right time, to re-engage the customer to drive sales and leverage its market-leading supply chain, format and data capabilities.

The FY25 result highlighted this need, Jarden laments, with little evidence of return on large capital investment, with sales weaker and June quarter items per basket down at a time the company had invested in price to drive volume – and when Coles and Chemist Warehouse ((SIG)) sales growth lifted.

How is FY26 Looking?

Woolworths warned of additional -$250m in cost headwinds in FY26, including the impact of illegal tobacco sales, replacement costs for its core retail systems, and reinvestment in lower shelf prices.

Coles has not just outperformed Woolworths operationally over the past four quarters, it is now pulling ahead of its larger rival as the latest sales data highlight, Ord Minnett notes, and there appears to be a lack of urgency on the part of Woolworths’ management to remedy the problem.

Further, it is clear to Ord Minnett the retailer’s target of carving -$400m from its head office costs will not be enough to restore the performance of a company that has become much more complicated, and much more expensive to run, than it should be for what is a relatively uncomplicated industry.

Woolworths’ FY26 mid to high single-digit percentage growth in Australian Food is dependent on top-line improvement. Morgan Stanley sees meaningful risk of additional price investment required (above the more than -$100m guided) to turnaround momentum, weighing on the outlook for gross profit margin and eroding the benefits from the company’s -$400m cost-out program.

The announcement of a further two distribution centres in Sydney and Melbourne pushes implementation costs into FY27, Morgan Stanley notes, and pushes out the timeline of potential benefits to FY28 and beyond. This, combined with an underwhelming strategic update, makes the case for meaningful earnings turnaround in FY27 and beyond less clear to this broker.

Australian Food requires a turnaround given the disappointing recent financial performance. Recognition of the challenge and its causes (execution in store, price perception, promotional effectiveness, negative mix from shift to online at the expense of stores) was limited, UBS suggests, delaying issues being addressed and the turnaround commencing.

UBS believes bolder action can be taken on costs above store level (stores and supply chain are relatively lean), with these savings able to fund investment. Yet a Woolworths turnaround requires not only frank recognition, in UBS’ view, a prudent strategy and sound execution, but also missteps from Coles.

Unfortunately for Woolworths, Coles is executing well (availability, online, promotions), UBS acknowledges, hence no evidence to date of missteps.

Far from it.

Supermarket sales growth of 4.7% in the June quarter and the FY26 trading update are consistent with industry feedback that Coles is still outperforming Woolworths in food categories, Citi notes, particularly in the online channel.

Contrary to consensus (which marginally favours Woolworths for top-line growth), Citi believes outperformance should continue for Coles given superior execution (aided by strong in-store availability as noted by management), further online growth from the CFCs and Woolworths’ depressed NPS score (which will take time to recover).

Coles’ FY26 sales outlook is nonetheless mixed, in UBS’ view, given tough comparables in the December quarter (cycling a $120m boost from Woolworth’s industrial action) but there are signs of improvement from the consumer which should boost basket size (trolleys are also available), while Coles’ execution is expected to benefit from investments (availability due to Witron ADCs, online due to Ocado CFCs) and ongoing promotional effectiveness (fewer, better).

FY26 earnings margins face cost of doing business pressures (D&A, energy, labour) and fewer theft tailwinds for gross margin, UBS points out, but is supported by the end of implementation costs, receipt of Witron cost savings and operating leverage, which coupled with strong execution, drive strong earnings growth.

Management suggested in Coles’ post-result conference call that “green shoots” are being seen in consumer sentiment, with customers more optimistic around household budgets. But value still remains key for purchase decisions.

Morgan Stanley highlights management’s belief there is still room to deliver gross profit margin expansion in FY26. Both ADCs will be fully operational (1/3 of benefits still to come), a less steep tobacco sales decline will be a tailwind, there will be further improvement in loss (albeit less material going forward), growth in Coles 360 (adding more assets), and further strategic sourcing and “Simplify to Save and Invest” (SSI) benefits.

Coles is running its own race, Jarden observes, focusing on what matters for customers to drive superior shareholder returns. The net result is a business yielding rising returns on capex (stores, supply chain) and opex (price, service, marketing) which would warrant a higher multiple if sustained.

While Jarden retains a preference for Woolworths, the broker’s conviction is falling. Woolworths’ FY25 result and outlook commentary were a key test, with a growing case for Coles to trade at a premium versus Woolworths.

Woolworths has been out-traded on the basics, Jarden suggests, and customers are responding with their wallets. The broker believes Woolworths can regain share but a re-focus on basics, customer engagement which may take time, particularly with Chemist Warehouse and Coles sales accelerating.

If Woolworths can regain momentum, Jarden sees material scope to re-rate but, at present, feels Coles is in a stronger position. The key question for Woolworths is: can it grow share? This was not evident in the result/update.

While Jarden acknowledges improving NPS scores, sales are what drives cash flow and valuation.

Ratings Rethinks

Despite the rally in Coles’ share price post result, Bell Poter upgrades to Buy from Hold. Continued delivery against SSI initiatives ($565m delivered to date versus a target of $1bn by FY27), generating a return on ADC/CFC investments and a strengthening consumer backdrop are all reasons for a more favourable view, Bell Potter believes.

Morgans does, however, have a problem with valuation.

In Morgans’ view, Coles is a well-managed business with defensive characteristics and strong market positions in both supermarkets and liquor. Management continues to execute well in relation to operating efficiency, product availability, and reducing loss with major supply chain investments to support improved margins over the long term.

While Coles remains Morgans’ preferred exposure in the supermarkets sector, the broker sees the current valuation as full and prefers a better entry point.

Macquarie, Citi, UBS and Morgan Stanley went into Coles’ result with Buy or equivalent ratings and those ratings are retained. Ord Minnett retains its Accumulate rating (one rung under Buy).

The consensus target among the seven brokers monitored daily by FNArena covering Coles has risen to $24.18 from $22.48.

By contrast, Ord Minnett retains a Buy rating on Woolworths.

Woolworths has the potential to be a world-class business, Ord Minnett suggests, but it will not be able to return to the top of the podium until its execution capability is significantly improved and its strategy is renewed. This potential, and the attractive valuation, supports the Buy recommendation.

Ord Minnett is now left with the only Buy rating among the same seven brokers covering Woolworths.

Bell Potter, Morgans Citi and UBS all went into Woolworths’ result with Hold or equivalent ratings and those have been retained, recalling that Woolworths share price fell some -15%.

Morgans sums up the views in suggesting Woolworths is a solid, defensive business with leading market positions and long-term earnings tailwinds from population growth and scale advantages. While FY25 was challenging, Morgans expects it will take time for management to fully execute its strategy and unlock the company’s potential. Until there is clear evidence of progress, Morgans anticipates the stock will trade broadly sideways.

Macquarie and Morgan Stanley both had Buy-equivalent ratings on Woolworths pre-result.

Post-result, Macquarie sees challenges as likely to persist in the near term, with ongoing price reinvestment [discounting] a potential, as Woolworths looks to improve customer perceptions and regain market share. Macquarie downgrades to Hold-equivalent.

So does Morgan Stanley.

Morgan Stanley factors in a modest turnaround in Australian food sales in FY26, but sees downside risk should momentum not pick up in the first quarter. Against Cole’s Supermarkets earnings growth, Morgan Stanley sees Woolworths’ current discount to Coles as justified and switches preference to Coles on: i) top-line execution; ii) clarity on productivity initiatives; iii) simplified business; iv) and nearer-term realisation of supply-chain benefits.

The consensus target for Woolworths has fallen to $30.82 from $33.07.

To sum up, Coles now has six Buy or equivalent ratings from the seven brokers and one Hold, while Woolworths has one Buy and six Holds.

With regard Coles, Jarden notes the industry is still concerned about competition, as Woolworths cut prices, new competition when Dollarama enters the market and growth of “category killers” continues (ie Bunnings ((WES)) in cleaning products and Chemist Warehouse in pharma). Jarden retains a Neutral rating on Coles with a $21.70 target (up from $20.60).

Near term, Jarden sees Coles as more likely to re-rate, owing to superior execution and capital allocation. Jarden remains positive on Woolworth’s long-term opportunity but sees execution as key. That said, Jarden retains an Overweight rating on Woolworths with a $30.10 target (down from $36.30).

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