Woolies and Coles: Results 2022 (2024)

Our supermarkets are seeing inflation coming through hard and fast, but Woolworths has managed to increase sales ahead of it, whereas Coles has been behind. Woolworths measured inflation at 4.3% in the June quarter, and achieved like for like sales growth of 5.2%, while Coles measured 4.3%, but managed a like-for-like sales increase of only 3.7%.

Woolworths led Coles in all four quarters of the 2022 financial year, and was ahead of the industry in the first half, but behind in the second.

That gives a clue to what’s happening, with the big supermarkets benefiting more from lockdowns, but the smaller independent stores performing better as things open up again, with people happy to do more frequent shops,but still tending to stay local,which tends to favour Woolworths over Coles.

Coles management said that the trend towards local shopping was beginning to unwind in the fourth quarter and we’d expect that to continue into the current quarter and year, with the addition of a shift to more out-of-home consumption compared to the lockdown-affected period last year.

Trading down

Those comparisons will make the first quarter a tough one in terms of sales growth, with Woolworths noting that the first eight weeks of the current year had seen a 0.5% fall in like-for-like sales.

Both Woolworths and Coles also noted that inflation and tighter household budgets are causingcustomersto trade down to frozen and canned vegetables and avoiding the more expensive meats.

Packaged items tend to have higher margins than fresh, so the change in mix had a positive impact on gross margins. Stock loss also reduced for both retailers, with help from security measures such as smart gates. Woolworths’ Australian grocery business saw its gross margin increase by 0.74 percentage points to 30.4%, while Coles’s rose by 0.42 percentage points to 26.3%.

However, increased costs due to supply chain disruptions, inflation, floods and covid held back the earnings before interest and tax (EBIT) margins, with Coles’s flat at 5.0% and Woolworths’ slipping from 5.5% to 5.3%.

Covid costs have started to improve, though. Woolworths reported only $18m of them in June quarter, compared to $65m in the March quarter, with the difference primarily due to a reduced requirement for RAT testing.

In all, Woolworths'covid costs of $83m in the second half were down from $205m in the first half. Extrapolating the June quarter would save about $200m and add around 0.5% to the EBIT margin.

Woolies atapremium

Woolworthsalso saw a big jump in revenue in its new B2B segment, following the acquisition of PFD Food Services in June 2021 as well as revenue from its supply chain partnership with Endeavour Group. That almost doubled the 5% revenue growth in its Australian Food business to 9% overall, but the lower margins in B2B, plus the margin fall in the Australian Food business, meant a 3% fall in EBIT.

Net profit, however, was flat due to an abnormally low tax rate of 27% (management expects a return to 29% in future), and earnings per share rose 3% to $1.23 due to a lower share count following the group’s share buyback.

Coles reported flat EBIT on a 2% increase in sales, although net profit rose by 4% and earnings per share by 5%, to 78.7 cents, due to lower interest costs and a reduced tax rate.

That puts Woolworths on a price-earnings ratio of about 30, compared to Coles’s multiple of 22. Based on the consensus forecasts for 2023, of $1.38 and $0.82, those multiples come down 26 and 21, a gap that is probablyjustified byWoolworths’ better execution and higher growth rates.

We’re nudging up Coles’s Buy price to $15, but both stocks are close to the middle of our price guides and remain a comfortable HOLD.