Coles tipped to trump Woolworths as sales slow

Woolworths and Coles ­report full-year results this week amid intense competition and price deflation.

The ABS says retail sales only managed a tiny 0.1pc gain in June.

Australia’s leading supermarkets, Woolworths and Coles, are expected to reflect the intense ­competition and price deflation running rampant through the food retailing sector when they ­report full-year results this week. Analysts say both are likely to post slowing like-for-like ­grocery sales in the final quarter of 2016.

For Coles, it will mark the 28th consecutive quarter it has beaten archrival Woolworths in terms of comparable sales growth if, as expected, it records faster growth than Woolworths in the fourth quarter, while for Woolworths, the embarrassment will run deeper as it unveils its first loss in 23 years as a public company.

The market expects Woolworths to report a loss of $1.22 billion when it unveils its full-year result on Thursday, as its bottom line succumbs to more than $4.2bn in impairments driven by its disastrous foray into hardware, spluttering growth at Big W and hundreds of millions of dollars poured into its problematic supermarket business, which is yet to yield any positive sales results.

Analyst consensus is for a pre-writedown profit of $1.58bn.

But Wesfarmers won’t be able to crow over Woolworths too much, with its full-year profit before writedowns tipped to slip slightly to $2.37bn when it reports on Wednesday. Its coal division should lose about $300 million, with $2bn in writedowns flowing from a range of operational issues, including the underperforming Target chain, that will wipe out most of its net profit.

Comparable store sales at Coles are forecast to slow down, but from a fairly strong base, while its ­loss-making coal and Target arms will spill red ink over the ­accounts.

Investors will also be keen to hear from chief executive Richard Goyder the early results from its recent ownership of British hardware chain Homebase and an update on plans to transform the stores into Bunnings. Both companies, however, will reveal the cost to them of the competitive heat across the nation’s $90bn grocery sector, as price deflation and shrinking sales growth for food ­retailers dents supermarket ­profitability.

Earlier this month, it was revealed Australian retail sales only managed a tiny 0.1 per cent gain in June, according to the ABS, undershooting the 0.4 per cent expected. Food retailing declined 0.6 per cent in the month.

“Generally it’s going to be a very difficult second half for supermarkets, both for Coles and Woolworths,’’ said Credit Suisse analyst Grant Saligari.

“We have seen at an industry level sales growth slow in the fourth quarter and we have seen some reasonable levels of price competition across the industry. We are expecting the supermarket profitability of both groups to be affected — in Coles’s case to slow, and for Woolworths, profitability to be hurt this year.’’

Mr Saligari said investors would be keen to see if the reforms and operational changes introduced by chief executive Brad Banducci were starting to show through in better sales at the supermarket checkout.

“In Woolworths there is a big focus on if some of the improvements, the changes that Woolworths are putting in place at store level, are starting to have any traction at all in terms of volumes, transaction size and baskets — those types of metrics that might be a forerunner to any change in the comparable store sales figure. We aren’t expecting any improvement for Woolworths in the fourth quarter, in fact we think it will be a little worse than the third quarter, but we are looking more for any of those early signals that might suggest that the supermarket business itself is performing, getting better traction with consumers.”

JPMorgan analyst Shaun Cousins agreed Woolworths shareholders would be looking for some glimmer of hope the flagship supermarket business was starting to shake off its poor run of results.

“For Woolworths shareholders, the key is are there signs of the turnaround playing out, and seeking to get an idea of the timing of any turnaround, as the risk is the competitive dynamics make it long dated and overall quite difficult.’’

Mr Cousins said Woolworths was making some positive changes to its culture, particularly balancing the needs of shareholders and customers.

“Woolworths under new management is less focused on putting the shareholder first, with the customer more prominent. This is pleasing. The lack of customer focus over at least the past five years is a key reason Woolworths is facing such a challenging turnaround.’’

At Wesfarmers, a management update on its new British business, Homebase, will be sought in the wake of the impact of the Brexit referendum vote and recent changes made to Homebase’s pricing in the £38bn ($65bn) British hardware sector.

“As the dust settles on the referendum, common sense is dawning that the sun still rises, which is good news for Bunnings to our minds, having just invested in Britain,’’ said Clive Black, head of research for London-based Shore Capital.

“We remain interested to see how Bunnings will manage Homebase, and with the devaluation of sterling, the cost of imported goods is going to rise and this poses an interesting challenge for all British retailers.”

Mr Cousins noted: “Wesfarmers has acquired an underperforming business in Homebase that has turnaround potential in the first instance, and then there is the opportunity to go after more of the £38bn British hardware market if the Bunnings trials starting later this year work.’’