Could Woolworths Limited and Wesfarmers Ltd shares rebound in 2016?

What: The Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) share prices have soared today climbing 2.98% and 3.08% in afternoon trade, respectively.

So what: Both the supermarket and retail giants’ share prices have come under selling pressure in recent months as speculation of an all-out price war between Woolworths’ supermarkets and Wesfarmers’ Coles spooked investors.

However, based on the results from both companies in recent years, clearly, Woolworths could be expected to lose its spot as Australia’s — indeed the world’s — most profitable supermarket chain. Despite consistently generating profit margins over 6% in recent years, while Coles carved out slightly more 3%, the market now believes Woolworths’ management has gouged consumers to impress investors – at the expense of the business’ long-term growth.

Indeed, current shareholders are now being forced to pay the piper. Growing competition from other low-cost supermarkets like Aldi and Costco is also chipping away at Woolies’ profit growth and market share. Woolworths’ recent profit downgrades have pressured its share price 20% lower from this time last year.

Now what: Turning around a $30 billion company isn’t easy. Consumers will usually shop at supermarkets for two reasons: convenience (e.g. location and parking), and price. While Woolworths has more stores, consumers’ perception of better value certainly appears to be with Coles and Aldi.

Wesfarmers is also fortunate to have more diversified earnings than Woolworths, with its Bunnings Warehouse, Officeworks, Kmart and Target businesses performing strongly. Therefore, for now at least, it appears Wesfarmers is in a better place to deliver outperformance in coming years.

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Motley Fool writer/analyst Owen Raszkiewicz has a financial interest in Woolworths.

Owen welcomes your feedback on Google plus (see below), LinkedIn or you can follow him on Twitter @ASXinvest.

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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