Coles shares a buy on great management, Woolworths disappoints again

Shares in Coles (ASX: COL) hit a record high on Thursday to extend its record of heavily outpacing Woolworths (ASX: WOW) in the race for supermarkets supremacy. 

Over the six months to December 31, Coles supermarkets net profits from continuing operations climbed 5% to $1.18 billion on sales up 3.7% to $23.04 billion . 

While Woolworths' profit tumbled nearly 21% to $739 million on sales up 3.7% to $35.93 billion. It blamed the result on cost inflation as rising wages, supply chain and running costs eroded its profit margins. 

Craig Young, a senior financial and equities analyst at Tyndall Investment Management, says Coles is outperforming Woolies due to the quality of its management team.

"For management, I'm talking about the top five or so people at Coles [are impressive] and if you compare Coles to Woolies in almost all cases I now prefer Coles. It actually used to be the other way around for a lot of the time," he says.

In particular, Young's impressed with the return on investments Coles is now seeing in areas such as its supply chain and online sales in the past couple of years. 

Coles' chairman, James Graham, also highlighted how it's now benefiting from prior investments in technology to cut costs and improve the overall shopping experience. 

"It was particularly pleasing to see benefits realised from our capital investments in automation, data and technology which allowed us to respond to the spikes in demand experienced during the half, in a way that would not have been possible previously," he said. 

On Thursday, Coles stock climbed more than 3% to a record high of $20.84 per share and it's now up around 66% since it hit the ASX boards at $12.49 per share in November 2018 after being spun out of Wesfarmers (ASX: WES). 

Meanwhile, Woolies shares are down 7.5% over the past year and off 6.6% over the past five years.

As part of Livewire’s Reporting Season coverage, I spoke to Young to find out why he thinks Coles is leaving Woolworths in its dust.

Coles 1H25 results

• Revenue: $23.04 billion vs expectations of $22.87 billion
• EBIT from continuing operations: $1,117 million vs expectations of $1061 million
• Q2 25 sales: up 4.9%, estimates 4.7% 
• Earnings per share from continuing operations: 44.9.c vs expectations 41.6c
• Interim dividend: 37c (vs expectations 35.6c) vs year-ago 36c; ex 5-Mar, payable 27-Mar, 100% franked
• No financial guidance provided no earnings guidance for FY 2025 was provided. However, Coles said: "Our focus in the second half remains on providing a compelling customer value proposition, making further progress on improving our fresh offer and continuing to tailor our ranges to make sure we have the right products in the right stores to cater for local customer preferences. We also remain focused on delivering the benefits from our major transformation investments."

Woolworths 1H25 results

• Revenue: $35.93 billion vs expectations of $36.03 billion
• EBIT from continuing operations: $1,451 million vs expectations of $1,494 million
• Q2 25 sales: up 1.7%, estimates up 1.5%
• Earnings per share from continuing operations: 60.2.c vs expectations 62.8c
• Interim dividend: 39c (vs expectations 39.2c) vs year-ago 47c; ex -Mar 5, payable 23-Apr, 100% franked
• No financial guidance provided no earnings guidance for FY 2025 was provided. However, Woolworths did comment "While we continue to optimise our promotional activity, cost-of-living pressures for customers persist with value-seeking behaviours and cross-shopping expected to continue. Livestock costs in red meat are also expected to impact gross margins in the half.

What was the key takeaway from these results in one sentence?

Coles is being very well managed at the moment. Its chairman and current management have put plans in place to improve the business and those plans now have a number of years to run.

They're still getting their act together and were affected by the strike that had more of an impact than expected and the recovery from that strike seems to be a little slower than expected.

Were there any surprises in this result that you think investors need to be aware of?

Coles rating: We hold, so we'll keep holding. If we didn't own, we'd buy. 

Woolworths rating: Either a hold or sell.

Are there any risks investors need to be aware of?

I'd say overall, Coles is looking pretty good right now. There's a big difference in the quality of management between Coles and Woolworths and that's an unusual situation in the relationship between Coles and Woolies.

For management, I'm talking about the top five or so people at Coles are impressive, and if you compare Coles to Woolies in almost all cases I now prefer Coles. It actually used to be the other way around for a lot of the time.

Woolies has a bit of work to do to get the business going forward, while Coles has a lot of plans in place they're acting on. 

Woolies needs to catch up, so the risk is that Coles continues to outperform Woolies given they have more settled management and have been delivering on their plans for a number of years.

For Coles, [a risk is that] the market hasn't got its mind around the increase in depreciation that some of these investments are causing and will cause in the future, but they're more than offset by the investments' benefits.

Rating: 4

The bank sector is very large [as a proportion of the market] and very expensive at the moment.

And you see strange behaviour in the market where it's disproportionately weighted to big expensive stocks like JB Hi-Fi, Wesfarmers and CBA.  The large and better quality stocks are getting overpriced to a significant extent.