Woolworths ‘stuck in the middle’ with Coles

Dark days are far from over for Woolworths investors.

Woolworths is getting squeezed by Aldi at the bottom and David Jones’s new upmarket food business at the top.

Dark days are far from over for Woolworths investors, with analysts tipping shares in the supermarket could face further pressure over the next year.

Indeed, analysts from brokerage Morgan Stanley are among the most bearish towards Woolworths and say the retailer’s shares could fall another 25 per cent.

The negative turn is in contrast to a surge of optimism that had built around new chief executive Brad Banducci’s turnaround strategy. Instead, investors have unresolved questions relating to competition and compressing food margins.

Woolworths fell another 1.8 per cent yesterday to $22.85, compared with a drop in the S&P/ASX200 of 0.9 per cent. The benchmark has been limping for some time, with four consecutive weekly falls now front of mind for investors. Woolworths remains one of the poorest performing blue chips of the period.

The widely held stock surged 7.2 per cent to a 10-month high on August 25 even as the company posted a writedown-marred loss of $1.23 billion as the market chose to focus on the positives of a full stop on the Masters hardware debacle and the potential for a turnaround story.

However Woolworths shares quickly resumed the downward trend they’ve been on since early 2014, when the market capitalisation of the company was $45bn compared with $29bn today.

“Woolworths is paying the price for strategic missteps in the past, in our view, (and) turning around a massive organisation takes a long time,” Morgan Stanley analyst Tom Kierath said.

Mr Kierath and his team reiterated their “underweight” view on Woolworths and set the 12-month price target at $17 a share. This is $5.85, or 25 per cent, below its last traded price.

While other analysts broadly remain downbeat on Woolworths, Morgan Stanley’s price target sits well below the consensus 12-month target of $23.35 among other brokers, according to Bloomberg.

“We believe the consensus is over-estimating Woolworths’ financial 2017 earnings per share by 10 per cent,” Morgan Stanley said, pointing to aggressive price investment from competitors Coles and Aldi. Competition and overall food price deflation are never far from key Woolworths themes, with ratings agency Moody’s recently warning of the threat posed by David Jones’s entry into the premium-priced groceries market, while Deloitte Access Economics this week argued stalled wages growth in Australia is squeezing food retailers in general. “Although we expect that the scale of David Jones food retail will remain small relative to Woolworths and Coles, which collectively control more than 60 per cent of the Australian grocery market, the upmarket customers that David Jones is targeting are likely to be less price sensitive, spend more in absolute dollar terms and be more profitable than Aldi’s customers,” Moody’s said.

That analysis has been seen as yet another ominous sign for the incumbent champions of Australian food retail, with overseas success story Aldi muscling in on price-focused customers and now David Jones pushing on premium products. Coles and Woolworths are being squeezed from the top and the bottom.

Meanwhile Deloitte notes “weak underlying income growth has slammed food retail, but low interest rates and asset inflation are saving non-feed sales”. In the last year the analysts say non-food retail has grown 3.4 per cent while food retail only edged 0.7 per cent higher.