Woolworths 3Q24 sales result was soft across the board. Will trends improve from here? We expect Woolworths relative performance to improve in each of its divisions in 4Q24e albeit the ongoing industry-wide slowdown will result in a very modest uplift. Woolworths weak growth relative to Coles is largely attributable to transitory factors. We expect 4Q24e comp growth of 1.2% for Woolworths and 2.5% for Coles. However, with less than 2% comparable sales growth, Woolworths will need cost savings to maintain earnings.

Woolworths reported FY22 EBIT down 1%. However, 2H22 was encouraging with EBIT up 8%. Australian Food had higher gross margins and improved cost management. Food inflation remains a tailwind for sales and earnings. We expect a tough 1Q23 in sales for Australian Food but then a recovery, and profit margins should rise substantially this year given lower COVID-19 costs and gross margin gains. There are partial offsets from weaker EBIT in NZ which is largely COVID-19 related and much higher overheads.

Coles reported FY22 EBIT of $1,869 million, down 0.2%. The result had some lower quality features to deliver net profit growth including low deprecation growth, a lower tax rate and the unwind of some provisions. We expect Supermarket and Express to see an improvement in EBIT margins in FY23e. The unwind of COVID-19 costs is the most significant driver, accounting for well over half the earnings growth.

Coles reported 1H22 EBIT down 4% to $975 million. The company has managed costs well and stabilised market share in Supermarkets, while growing share in Liquor.  We expect sales and earnings to improve in 2H22e, driven by higher food inflation. We estimate an acceleration of 150bp in packaged grocery inflation. Note there will still be a headwind to earnings in Liquor from rising costs and in Express as tobacco sales fall.

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.