Broker Watch

ASX Reporting season preview: Coles and Woolworths

Tue 02 Aug 22, 11:57am (AEST)
REIT 1 Woolworths shopping centre supermarket
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Key Points

  • Morgans expects Woolworths and Coles profits to ease amid widespread industry cost pressures
  • Woolworths earnings forecast to bounce back in FY23 as Big W rebounds from lockdowns

Morgans views on supermarket giants Woolworths (ASX: WOW) and Coles (ASX: COL) heading into August reporting season.

Coles: Smarter Selling

Morgans is closely watching Coles' average prices, which increased 3.3% in the third quarter of FY22. This was ahead of Woolworth's average price increase of 2.7%.

The broker said its EBIT forecasts are in-line with consensus for FY22 but below in FY23. Though, noted its forecasts could be conservative if Coles manages to deliver sales growth at a rate greater than cost inflation.

Morgans highlighted a few areas of focus including:

  • Smarter Selling initiative poised to deliver $200m of benefits in FY22

  • Liquid margins fell 40 bps in the first half of FY22. Further investment is expected to drive better margins

  • Fuel volumes fell -2.2% in the third quarter, impacted by lockdowns in NSW, VIC and ACT. Volumes are expected to improve in late FY22

Earnings forecast at a glance

Full year

2022e

2021

% change

Revenue ($m)

39,425.6

38,562.0

2.2

EBIT ($m)

1,827.9

1,873.0

-2.4

EBIT margin (%)

4.6

4.9

-22bp

Underlying NPAT ($m)

996.7

1,005.0

-0.8

Total DPS (cps)

61

61

unch

Source: Morgans | Table: Market Index

 

The broker is Add rated with a $20.65 target price.

Woolworths: Shift in spending

"We forecast Australian Food 4Q22 like-for-like sales to be up 3.0% vs. 4.4% in 3Q22 with the slowdown reflecting a shift from eating at home to eating out as economies reopen," said Morgans.

Average prices at Woolworths rose 2.7% in the third quarter of FY22 and likely to accelerate in the next quarter, reflecting widespread industry cost pressures, the broker notes.

Big W is viewed as a segment that'll likely report 'heavily impacted' first-half earnings due to lockdowns. Second-half earnings will begin to make up for lost time as restrictions ease.

Earnings forecast at a glance

Full year

2022e

2021

% change

Revenue ($m)

61,340.7

55,694.0

10.1

EBIT ($m)

2,625.9

2,764.0

-5.0

EBIT margin (%)

4.3

5.0

-68bp

Underlying NPAT ($m)

1,446.5

1,504.0

-3.8

Total DPS (cps)

87.4

108.0

-19.1%

Source: Morgans | Table: Market Index

 

Morgans said its EBIT forecasts was largely in-line with consensus. In FY23, the broker forecasts EBIT to rise 17% thanks to growth in the Australian Food division and a continued rebound in Big W.

The broker is Hold rated with a $40.35 price target.

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Written By

Kerry Sun

Finance Writer & Social Media

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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