If you were wondering how much longer can Coles’ pain and Woolies’ gain last, the short answer is: for quite a while yet! It is a good thing that Wesfarmers Ltd (ASX: WES), the owner of the Coles supermarkets, is well diversified as its Bunnings and coal businesses will help offset the bad news from Coles as the latest supplier survey conducted by UBS paints a gloomy picture. Its share price has actually held up reasonably well due to its conglomerate structure as it is up around 8.6% over the past 12-months – just slightly ahead of arch-rival Woolworths Group…
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If you were wondering how much longer can Coles’ pain and Woolies’ gain last, the short answer is: for quite a while yet!
It is a good thing that Wesfarmers Ltd (ASX: WES), the owner of the Coles supermarkets, is well diversified as its Bunnings and coal businesses will help offset the bad news from Coles as the latest supplier survey conducted by UBS paints a gloomy picture.
Its share price has actually held up reasonably well due to its conglomerate structure as it is up around 8.6% over the past 12-months – just slightly ahead of arch-rival Woolworths Group Ltd (ASX: WOW), which is far more exposed to the supermarket sector, although that pales in comparison to grocery distributor Metcash Limited’s (ASX: MTS) 50% plus gain.
The broker says Coles has “lost its way” and has cut its FY18 and FY19 earnings projections for the business after talking to 45 suppliers as it found that Coles’ December-half performance has plummeted to levels not seen since 2009.
UBS said that the calibre of its staff and moral are at record lows since the broker started its survey; while Coles’ on-shelf availability, promotions, marketing and other consumer-facing metrics are weak and ineffective.
The broker’s conclusion was that Coles management is too focused on price and not on other factors (such as quality of products, customer service, etc) that drive customers to its stores.
This is actually good news for Woolies in more ways than one. Besides obviously taking market share from its rival, Coles may not wage another supermarket price war if price is not the key issue to Coles’ underperformance.
However, Wesfarmers will need a new strategy for Coles and that means more pain for shareholders as new strategies require capital and time to show results. We may need to wait another six to 12 months to see any green shoots.
This leaves plenty of room for Woolies to outperform and Citigroup is the latest broker to upgrade the stock to a “buy” as the broker expects Australia’s largest supermarket chain to sustain its like-for-like (LFL) sales growth lead over Coles for the next two years.
LFL sales measures revenue from stores that are opened for at least a year and Citigroup is tipping a whopping 320 basis point difference in LFL growth between the two for FY18.
“Differences in execution levels explain more than half of this sales growth gap, as Woolworths improves and Coles deteriorates,” said Citigroup.
“In addition, Woolworths store closures, elevated refurbishment activity, significant investment in online and Coles’ range rationalisation program are all contributing to the wide FY18e LFL sales gap.”
Citigroup has a $30.50 price target on Woolworths and reiterated its “sell” call on Wesfarmers with a price target of $41.50.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. 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.