Woolworths tipped to reclaim sales lead over Coles: Morgan Stanley

Morgan Stanley has tipped Woolworths’ sales to overtake Coles’ for the first time in six years.

Morgan Stanley said it was too early to call the December quarter in favour of Woolworths. Picture: Ian Waldie/Bloomberg.

Woolworths will likely reclaim the sales leadership baton from bitter rival Coles in the December quarter for the first time in six years, according to Morgan Stanley analyst Thomas Kierath.

In a note to investors, Mr Kierath said supermarket suppliers had picked up on a more reactive Coles, a sign Woolworths may have extended the momentum picked up in the September quarter when it closed the gap on its peer.

“Our discussions (with a number of large suppliers) suggest that a change in leadership that began in September has continued into the second quarter,” he said.

“Woolworths’ like-for-like sales growth now appears to be ahead of Coles — if reported this would be a first since the first quarter of 2010.”

Conversely supplier feedback on Coles was that it has become more reactive to Woolworths and is increasingly pulling forward promotions. For instance, “Coles is now offering significant discounts — up to 15 per cent — for large basket shoppers,” Morgan Stanley analysts said.

In the three months to September 30, Woolworths showed an increase in comparable sales of 0.7 per cent, while Coles logged a 1.8 per cent rise.

The differential has shrunk from six percentage points to 1.1 in just two quarters.

Regardless of whether Woolworths officially usurps Coles in terms of growth through the quarter, Morgan Stanley — a Woolworths bear — noted the “very clear” view of suppliers suggested was of an improving business.

“A theme consistent across all our discussions with supermarket suppliers has been the improvement in Woolworths trading,” Mr Kierath wrote.

“The drivers, according to suppliers, are better promotional effectiveness, greater stability in buyers and the relaunched loyalty program.”

Among the sales push seen from Coles was an offer of a 15 per cent discount for loyal, large basket shoppers.

Morgan Stanley said it was too early to call the December quarter in favour of Woolworths, however, given the weeks immediately leading up to Christmas serve as the most important of the year.

Despite the improved confidence in Woolworths, Morgan Stanley is unwilling to backtrack from its ‘underweight’ view on the company’s shares.

It has left its price target at $20 a share given margins will likely remain under pressure, although it noted “less downside (risk) to the shares than previously”.

At 4pm (AEDT), Woolworths shares had given back 0.9 per cent to $22.74, while Coles owner Wesfarmers had surrendered 1.3 per cent to $40.36.

Morgan Stanley has a $41 a share price target on Wesfarmers.