Woolworths 3Q22 sales results show the company is holding onto market share gains in supermarkets and managing COVID-19 costs more tightly. The pace of inflation is picking up across the board, but the drag on volume is small. We expect supermarket sales trends to be consistent in 4Q22e and Big W should return to growth as it laps an easier baseline with less COVID disruptions.
Woolworths reported sales up 8% but EBIT down 11% in 1H22. Even though COVID-19 disruptions added costs, underlying cost growth was also elevated, which we attribute to higher online sales. The company noted that food inflation had accelerated 2%-3% in early 2022, which is a good sign for earnings. We expect Woolworths to proactively work on lowering costs over the next two years.
We have a positive outlook for both revenue growth and profit margins for Coles, Metcash and Woolworths. Higher food inflation is likely to show through and offset the pressures from lower population growth and lapping COVID-19 induced sales growth. Higher inflation is not simply transitory, but has been evident since 2019. The market structure in both supermarkets and liquor add to the investment appeal. We also see a strong recovery for Endeavour Group and can make acquisitions in Hotels.