Top broker says Coles sales growth to outperform Woolworths Group Ltd (ASX:WOW) by 60%

Our largest supermarket chain Woolworths Group Ltd (ASX: WOW) is seen to be the better operator than Coles but Credit Suisse believes the Wesfarmers Ltd (ASX: WES) owned supermarket will produce quarterly sales growth that will be 60% above Woolies.

The share price of Wesfarmers jumped 0.3% to $48.95 while Woolworths dropped 0.4% to $28.12 on Wednesday.

Wesfarmers has outperformed Woolies since the start of 2018 with a gain of 10% compared to a 3% gain by its rival and a flat return from the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index.

Wesfarmers could extend its lead as its Coles division is expected to report a 4% increase in September quarter sales while Woolies is forecast to report a 2.5% increase, according to Credit Suisse.

“We upgrade our Coles sales forecast and leave Woolworths unchanged as we approach their respective first-quarter sales results on 15 October and 1 November,” said the broker.

“We upgrade our Coles Food & Liquor LFL [like-for-like] sales forecasts to 4% YoY (prev. 2%) in 1Q and to 2.5% from 2Q (prev. 2.0%) supported by price inflation in meat, fruit and vegetables, the continued success of the Little Shop promotion in 1Q19 and Coles’ transition to reusable bags.”

On the other hand, Credit Suisse has left its Woolworths LFL sales forecast unchanged as food price inflation will offset early weakness in sales.

Grocery price inflation is good news for sales growth for the supermarkets, including grocery distributor Metcash Limited (ASX: MTS), but rising costs could hurt profit margins as supermarkets may not be able to pass on all the cost increases due to intense competition.

The big outperformance in Coles’ quarterly sales will not last though as the Little Shop promotion is over and it’s joined Woolies in not giving out free plastic bags.

However, what surprised me was that Credit Suisse is forecasting similar quarterly growth figures for both Coles and Woolies of 2.5% for the remaining three quarters of the 2019 financial year.

While few would dispute that Coles will outperform in the latest quarter, several brokers believe that Woolies will once again pull ahead of Coles as its management team has a much better track record of driving sales than Coles.

The latest update from Wesfarmers on the spin-off of Coles into a separately listed company also confirmed that Coles has to make a large investment in its business in order to compete with Woolies and its discount rivals like Aldi.

I think you won’t get much of a consensus if one stock is clearly better than the other, although my bet is on Wesfarmers.

This has little to do with LFL sales growth but the divestment of Coles. I like companies that are spinning off assets as history has shown they tend to perform better than the overall market.

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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 Scott Phillips.

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