The ACCC has approved the merger between Sigma and Chemist Warehouse.We expect the issuance of new shares to Chemist Warehouse will not be until February 2025 at the earliest and could be in March 2025. For a brief period, the stock could have a float-adjusted market cap of $14 billion. By April 2025, the market will increasingly turn its attention to the fundamental earnings and valuation drivers. The most compelling feature is strong revenue growth of circa 10-12%, with more than half from store count growth. The greatest unknown is where sustainable margins settle.
Coles (31 October) and Woolworths (30 October) 1Q25 sales results are likely to reflect a small improvement in industry growth with a slight edge for Coles in terms of supermarket growth rate. We forecast Coles comparable sales growth of 2.6% and Woolworths at 2.1%. The bigger debate is whether industry growth will improve further given supermarket volumes remain sluggish and whether the retailers face any limits on their ability to sustain profit margins as the ACCC Supermarket inquiry continues. We expect softer results from Coles and Woolworths’ other segments in 1Q25e.
We expect signs of slowing sales, which reflect weak volumes and decelerating inflation. For Coles, we forecast 3Q24e Supermarket comp sales growth of 4.3%. We estimate Woolworths Food comps to rise by 1.5% and for Endeavour Retail we forecast comp sales to increase by 0.7%. While the differential in growth rates will be of interest, the bigger concern for the retailers is the continued weakness in volumes. Inflation is set to slow from here and comp sales growth could be even weaker in 4Q24e, which is a challenge for the retailers given cost growth remains far higher.
Coles reported FY21 EBIT of $1,873 million, up 6%. The second-half EBIT was flat. Coles Supermarkets had a much stronger 4Q21 sales result and stabilised market share. While the sales outlook is improving, we note that cost growth was elevated in FY21, and higher costs will be a handbrake on any further margin expansion.