ASX Reporting season preview: Coles and Woolworths

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

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

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.