Coles & Woolworths: 2023 Profits Amid Challenges

The Australian grocery sector is set to face heightened public attention as supermarket leaders Coles and Woolworths prepare to announce their yearly profits. However, experts suggest that escalating costs might hinder sector growth.

Coles and Woolworths shares have seen significant appreciation leading up to their August announcements, with Coles’ stock rising 9.2% since the beginning of the year and Woolworths surging by 15.9%.

Despite the broader retail sector experiencing a decline in spending, both companies are forecasted to report increased earnings for 2023. Predictions suggest Coles will report earnings before interest and tax (EBIT) of approximately $1.97 billion, a 5% increase. Woolworths, on the other hand, is projected to report a group EBIT of about $3.1 billion, marking a 16% increase.

Citi, an investment bank, anticipates a minor rise in Coles’ EBIT margin to 4.97% for 2023. Meanwhile, Woolworths’ margin is predicted to reach 4.9%, a jump from 4.4% the previous year.

The focus this month will be on the profit margins of both companies, especially in light of the pressures from sustained inflation and climbing mortgage rates. Recent data indicates a 1.6% rise in food and beverage prices for the June quarter, a 7.5% increase year-over-year. A recent UBS report also highlighted an 8.8% food inflation at Coles and Woolworths in June.

While increasing inflation has boosted sales in the grocery sector, experts believe the rise in operational costs might affect earnings margins. Morgan Stanley analysts comment that food inflation’s impact on sales is expected to reduce in the upcoming financial year.

Analysts are keen to understand how both supermarkets are handling operational costs, especially in light of labor costs and the Fair Work Commission decision. 

Johannes Faul, a Morningstar retail analyst, mentioned that due to various factors, including COVID-related costs, comparing the companies’ margins with past years would be challenging. He also expressed concerns about competitors like Aldi taking a more significant market share.

Both Coles and Woolworths have acknowledged the growing competition in the grocery space. Woolworths’ chief commercial officer, Paul Harker, emphasized the competitive nature of their industry, noting that customers easily switch retailers to find better deals.

Opinions are divided among market experts on whether investing in these supermarket giants is advisable. Data from Bloomberg indicates a split verdict, with eight analysts recommending a “buy,” five suggesting to “hold,” and five rating them as a “sell.”

Coles will reveal its 2023 earnings on August 22, followed by Woolworths on August 23.

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