Wesfarmers on slide as Coles woes hit home

Shares in Wesfarmers continued to dive a day after posting disappointing first-quarter sales growth for Coles.

Coles generated same-store sales growth of 1.7 per cent against analyst expectations of 3 per cent. Picture: Toby Zerna

Shares in Wesfarmers continued to dive a day after posting disappointing first-quarter sales growth for Coles, with analysts arguing robust sales increases will be difficult to find due to fierce competition and deflation keeping a lid on growth.

Wesfarmers slipped $1.13, or 2.72 per cent, to close at $40.32 after giving up nearly 6 per cent in the previous trading session as investors reacted to news that food and grocery sales growth at Coles had nearly halved, Target sales plummeted by more than 20 per cent and even juggernaut Bunnings suffered a slowdown.

But the biggest focus was on Coles, which generated same-store sales growth of 1.7 per cent against analyst expectations of 3 per cent. It was almost half the 2.8 per cent growth posted in the final quarter of 2016 and down from 3.6 per cent for the first quarter last year.

“A closer examination indicates that September like-for-like growth was likely flat as Woolworths invested hard relaunching the loyalty program and offered significant discounts to big-basket shoppers,’’ said Morgan Stanley analyst Thomas Kierath.

“While it’s unlikely to see Woolworths continue this level of price investment, the weak first quarter 2017 exit rate and a more difficult second-quarter comparable period likely means Coles like-for-like sales growth slows further. “We see the Coles slowdown driven by a combination of Woolworths price investment and a more competitive supermarkets industry.”

Morgan Stanley has lowered its food and liquor EBIT margin for Coles to 4.6 per cent from 5.4 per cent given the weak first quarter and continued price investment. It has also taken down its Wesfarmers share price target to $41 from $43.

Further evidence of whether Coles slowdown is a reflection of a wider weakening in the supermarkets sector will be seen today when Woolworths releases its first-quarter sales results. Recently Woolworths noted its growth for the first eight weeks of the quarter was 0.3 per cent, suggesting it was winning shoppers back from Coles.

“Woolworths’ improvement in a tough market doesn’t leave much for Coles,’’ said Deutsche Bank analyst Michael Simotas.

“Coles’ sustained run has been underpinned by a strong top line which has driven operating efficiencies, enabling the group to provide incremental value for customers while growing or at least preserving margins.

“There are risks with calling one quarter a trend but we believe Woolworths is improving in an environment where deflation is constraining market growth and Aldi continues to gain share.

“We believe sales growth will be increasingly difficult to come by which could undermine the value loop that has been pivotal to Coles’ success.”