Woolworths improving 3Q25 sales trends suggest the disruptions from distribution centre strikes and public scrutiny are settling. We expect sales trends to remain near prevailing levels and the differential in growth between Coles and Woolworths will be small. Big W’s losses are accelerating and the retailer’s plans for improvement will be difficult to execute given the competitive backdrop. Losses could grow and an exit or sale of Big W is increasingly likely in our view.

The upcoming 3Q25e sales results for Coles, Woolworths and Endeavour Group are likely to show Coles in front in both supermarkets and liquor. The shift of Easter timing will distort growth rates. We forecast Coles Supermarket comparable sales at 3.0% and Woolworths at 2.6%. For Coles Liquor, we forecast 2.6% and Endeavour Retail at -0.3%. All figures are Easter-adjusted. We will be interested in any step change in inflation for produce and meat given recent weather disruptions. Overall industry sales growth rates remain lacklustre, particularly relative to cost growth

The ACCC Supermarkets Inquiry report has 20 recommendations. None of these recommendations step change earnings, but the report does highlight three things. Firstly, supermarkets will have more margin volatility in fresh produce; secondly, it provides a reminder that price inflation does lift the industry profit pool; thirdly it will be difficult for Coles and Woolworths to grow market share given limits on new stores and elevated gross margins in some categories.

Coles reported 1H25 EBIT up 5% with a stronger lift in its Supermarkets division of 7%. The company had solid sales trends, which partly reflected a benefit from Woolworths DC strikes. Underlying sales and EBIT growth in the Supermarket business is closer to 3%-4%. Cost savings and DC efficiencies are offsetting natural cost inflation, not boosting margins. Over the next 18 months, Coles will benefit from the unwind of transition costs that will lead to double-digit EPS growth.

Woolworths reported sales up 4%, but EBIT down 14% in 1H25. We expect the company will have a challenging 2H25e as well. Management is starting to address its challenges. CEO, Amanda Bardwell, said that the company will assess the shape of its business portfolio. Each business unit must have reasonable prospects on a 3-5 year view. Overhead costs are being cut and there is a tougher stance on the low returning Big W and NZ divisions.

Woolworths is having a challenging time in its core supermarket business. The recent distribution centre strike will impact sales and earnings in 2Q25e, but should dissipate. More fundamentally, the company’s price investment is unlikely to deliver a decent return and online sales are margin dilutive. Across the industry, the drop in supermarket inflation gives us cause for concern about the industry’s sales and margin outlook over the next two years. While a short-term winner from the strikes, broader industry sales weakness will make it hard for Coles to deliver decent sales growth in 2025.

Coles reported 1Q25 supermarket sales trends slightly ahead of Woolworths. The bigger debate is whether Coles has achieved the result with less price investment. The short answer is yes, but not in a way that will protect Coles sales or margins in future. Overall growth is weak for both retailers with broadening competition for groceries in Australia. Coles decision to build another Witron DC in Victoria is logical but the cost increase suggest the return on capital may be lower than the first two DCs it built.

Woolworths reported better 1Q25 sales trends compared with recent quarters. However, the company has increased its price investment to achieve the better sales result. This price investment is likely to continue and will weigh on profit margins in FY25e with a gradual recovery requiring a cost focus beyond that year in our view. There is a risk that the discounting incites a response. Big W and NZ have had better sales growth in 1Q25 as well, but margin recovery will be years away.

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.

Woolworths reported FY24 EBIT of $3,223 million, up 3% on a reported basis, or 1.1% adjusted for the extra week. Second-half EBIT fell by 1.3%. While Australian Food EBIT was decent, New Zealand Food and Big W had very weak results. Online sales are accelerating for Woolworths, but the overall benefit to earnings seems limited given supermarket store profits declined in 2H24. Woolworths also provided guidance on capex at $2.0-$2.2 billion for FY25e.