EARNINGS of Australia’s top supermarket chains are likely to show constricted spending, presenting a challenging outlook for Woolworths and Coles, even as consumers deal with painfully high mortgage rates and sticky inflation.
Decade-high interest rates and stubborn inflation still running above the central bank’s target range has prompted consumers to be mindful of their spending, analysts warned.
The results will show the impact of a protracted cost-of-living crisis on the companies, which ring up two-thirds of every Australian dollar spent on groceries, and are closely watched as barometers of the wider economy.
Consumers are becoming more discerning by trading down in items such as food, by choosing lower-priced items and eating more often at home, UBS analysts wrote in a note.
Woolworths and Coles “face headwinds over the next 12 months because it’s unlikely the economic outlook will improve due to the higher rate environment”, said Kyle Rodda, senior financial market analyst at Capital.com.
The softening in consumer demand should be reflected in their earnings, he added.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Woolworths is set to report annual results on Wednesday (Aug 28), and its smaller rival, Coles, on Aug 27. Analysts on average expect Coles to fare better.
Coles has said it expects more volume growth from a surge in supermarket sales in the third quarter, in contrast to Woolworths, which posted weak food sales.
Tim Waterer, KCM Trade’s chief market analyst, said: “With cost-of-living pressures remaining a hot topic, I expect that the profit margins of the big supermarket chains will again be under the microscope.”
Jefferies analysts expect underlying earnings margin expansion for Coles, rebounding from a period of margin contraction the year before, and due to benefits from initiatives to connect brands with customers.
Meanwhile, Australian food underlying earnings margin for Woolworths is expected to contract due to increased business costs and supply-chain investments.
Net profit after tax (NPAT) from continuing operations for fiscal 2024 is expected to come in at A$1.10 billion (S$970,819) for Coles, slightly higher than the A$1.04 billion the year before, Jefferies estimated.
However, NPAT before significant items for Woolworths is expected to decline to A$1.67 billion, from A$1.72 billion last year.
Woolworths could also announce a special dividend along with its annual results, from the proceeds of its stake sale in liquor store and pub operator Endeavour Group, analysts said. REUTERS
