Down down, [share] prices are headed down

There's been a lot of negative media attention circling Australia's biggest supermarkets in recent months - and for good reason. Australians are sick to death of the price-saving mirage - with many accusing Woolworths (ASX: WOW) and Coles (ASX: COL) of price gouging - or lifting prices to levels considered far higher than fair. 

Whether or not a Senate inquiry finds that to be the case in the coming months, the two major supermarket players have arguably benefited over the last six months - with sales lifting 4.4% at Woolworths and 3.7% at Coles. Woolworths and Coles also both beat analyst estimates on earnings - so there's that too. 

According to IML's Hugh Giddy, there are further headwinds on the horizon for Australia's two largest supermarkets over the coming 12 months - in addition to the aforementioned Senate inquiry, including increased costs and increased competition from the likes of Bunnings, The Reject Shop and Chemist Warehouse. Plus, of course, a leadership change at Woolworths - while several months away - could also pose some risk. 

So, is it worth separating your anger at Woolworths and Coles leadership to invest in these defensive stocks? You'll find out in this wire. 

H1 Key Results 

Woolworths

• Revenue of $34.64 billion vs analyst estimates of $34.66 billion
• EBIT of $1.69 billion vs analyst estimates of A$1.68 billion
• NPAT of $929 million vs analyst estimates of $946.6 million
  
• Interim dividend 47 cents per share (fully franked)
• CEO Brad Banducci resigns. Will be replaced by Amanda Bardwell 
• For more financial data on Woolworths, head to Market Index

Coles

• Revenue of $22.22 billion versus analyst estimates of $22 billion
• EBIT of $1.06 billion versus analyst estimates of $996.1 million 
• NPAT of $594 million versus analyst estimates of $554 million 
• Interim dividend of 36 cents per share (fully franked) 
• For more financial data on Coles, head to Market Index

In one sentence, what were the key takeaways from these results? 

The key takeaway for Coles was a stronger result, particularly at the start of 2024, with volumes and sales benefitting from the Pokémon Collectible promotion. Whereas Woolworths you've seen a slowdown in volumes this year and the CEO's departure.

Were there any major surprises in these results that you think investors should be aware of? 

Obviously, the departure of Brad Banducci later this year... 

Other than that, Woolworths is the higher-valued company, but Coles has outperformed recently. The takeaway is this sales leakage in what you could call non-food items - things that you find in the supermarkets such as washing powder, laundry detergent, vitamin pills, etc. You've had Bunnings start aggressively selling big batches of laundry powder, Chemist Warehouse, in New Zealand The Warehouse, The Reject Shop - that's been an issue for Woolworths and Coles and both have cited that.

Would you buy, hold or sell these stocks on the back of this result?

Coles: SELL

Woolworths: HOLD

The market has spoken in pushing Coles up and Woolworths down - so you can see the market has rightly called the better result. Would I buy Coles or Woolworths? I wouldn't buy either of these stocks, because they're not very cheap given their low growth and there's quite a lot of pressure on their pricing with the Senate inquiry. But if you had to own one, I would say Woolworths offers better value than Coles post these results.

What’s your outlook on this stock and the sector over the year ahead? Are there any risks to this company and its sector that investors should be aware of?

On the positive side, volumes benefit from population growth - and Australia has quite high migration. You might get some benefit from people eating more at home. Although, you haven't already seen that. But the problems are that food inflation is down and their costs are up - like wages are up 6.25% with the minimum wage decision. And they also have the headwind of people stopping smoking cigarettes and starting vaping and so on, and that was quite a high-value item. So that does hurt. Plus, the growth in the non-supermarket sector - attacking things sold in the supermarket. So it is a tough outlook and Woolworths and Coles are highly valued compared to their global peers. 

There's been a lot of negative media coverage on both Woolworths and Coles recently - and that impacts investors but it also doesn't. Most investors are looking at their opportunity set and these stocks, like many of the consumer staples, haven't been incredibly exciting over the past year - they've underperformed the market. If we face tougher times, they might outperform, but they would only outperform because the market goes nowhere, rather than going up a lot. That would be my sense. 

From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious about the market in general? 

Rating: 4

Let's go a four. There are pockets of value. As I said, some stocks haven't done a lot and Metcash (ASX: MTS) is one - it does have some hardware exposure. It's been doing quite well, but the share price is probably still down for the year. 

There are pockets of value around, but overall, we've got a market dominated by banks and resources. Resources prices are falling but not all the resource companies have come off, as much as prices have. And prices look vulnerable in the case of iron ore. Our banks are the most expensive in the world. They have been expensive for a while, but they've gone up quite a lot recently and I think that's unsustainable because their earnings are going backwards.

Then we look at the growth stocks within the market, which are things like the technology stocks, the classified companies like REA Group (ASX: REA), CAR Group (ASX: CAR) or Domain (ASX: DHG). Those are all quite expensive and have gone up a lot. Same with Cochlear (ASX: COH) and James Hardie (ASX: JHX). So, growth stocks have done very well, they are following overseas markets. And you have very very high investor confidence. Normally, this would be the time to be more cautious, if you're a long-term investor, not a speculator. So, while we might find pockets of value, I'd say those pockets are smaller than they used to be or ideally should be.

• Read Announcement - Coles 2024 Half Year Release
  
• View Presentation - Coles 2024 Half Year Results Presentation
  
• Read Announcement - Woolworths 2024 Half Year Release 
• View Presentation - Woolworths 2024 Half Year Results Presentation

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