Woolworths at five-year lows as selloff intensifies: Can it find a floor?

One of the key lessons coming out of August reporting season was to stay away from stocks that missed earnings expectations, and Woolworths (ASX: WOW) serves as a textbook example.

It's tempting to label Australia's largest supermarket as a "defensive" stock with stable earnings and dividends, but the share price tells a different story. The stock has fallen 20% since its FY25 result on 26 August and is now trading at levels not seen since May 2020.

Over the same period, the S&P/ASX 200 has been flat.

In the 31 trading sessions since the result, Woolworths has closed lower on 23 occasions (74%). Despite being heavily oversold, it's managed just one meaningful bounce on 4 September, which coincided with a 1.0% bounce for the broader ASX 200.

Woolworths daily price chart (Source: TradingView)

So where does this leave a household Australian brand that most of us visit weekly?

The FY25 result

The share price reaction to the FY25 result was brutal. The stock gapped down 10.2% at the open and finished the session down 14.7%. While headline numbers roughly met expectations, the underlying details raised concerns:

• Revenue up 3.6% to $69.08bn vs. $69.31bn est (0.3% miss)

• EBIT ex-items down 12.6% to $2.75bn vs. $2.78bn est (1.1% miss)

• Normalised NPAT down 17.1% to $1.39bn vs. $1.38bn est (0.7% beat)

• Final dividend down 21% to 45 cps, total dividend down 41% to 84 cps vs. UBS ests of 86 cps (2.3% miss)

The red flags include:

• EBIT from the Australian Food segment, which generates the majority of Group EBIT, fell 12.6% to $2.75 billion, landing 1.2% below consensus.

• Australian Food's return on funds employed (RoFE) dropped 4.8% year-on-year, which RBC Capital Markets analyst Michael Toner called "concerning for investors"

• Australian Food's reported 2.1% total sales growth for the first 8 weeks of FY26, which fell short of market expectations

• Over the same eight-week period of FY26, Coles reported 4.9% sales growth

For context, Coles is trading near record highs and up 21% year-to-date. The company beat market expectations for both net profit and dividends in its FY25 result (also 26 August), while delivering a stronger-than-expected FY26 trading update.

What now?

We're left with a comparatively stronger Coles and a struggling Woolworths.

Following the FY25 result, the average analyst target price was cut 6.2% to $30.67 amid concerns about declining market share, heavy capital spending that hasn't delivered strong returns, and supply chain benefits now pushed to later years.

In a research note from last month, Morgan Stanley noted that Coles has begun outperforming Woolworths for the first time in almost a decade. Woolworths faces an expensive turnaround requiring potentially $200 million in price investment for FY26 just to achieve 3% same-store sales growth, double what Coles spent in FY25, creating significant earnings downgrade risk.

The challenge is that Woolworths will eventually bottom and find a floor, but identifying that point is difficult. Recent dip buyers have only watched the share price continue falling, even as broader equity markets remain buoyant.

According to Macquarie's post-result modelling from August, Woolworths and Coles are trading at relatively similar EV/EBITDA multiples of 8.7x and 9.2x respectively, based on August share price levels and FY26 estimates.

The bottom line

It might be tempting to call a bottom here, but significant uncertainties remain around the weak start to FY26, gross margins, market share, and supply chain issues.

More broadly speaking, reporting season losers that suffered massive results day selloffs like Reece, Domino's Pizza, IPH, CSL and Sonic Healthcare have all continued to trend lower.

Woolworths (green) vs. Reece (red), Sonic Healthcare (blue), CSL (purple), Domino's (orange) and IPH (light blue) | Source: TradingView

This price action offers some perspective that multiples aren't everything. Instead, factors like meeting consensus expectations and momentum (both fundamental and technical) also play a role.