The other side of lockdown – ASX supermarket shares are flying

While half the country is stuck at home, supermarket shares are flying.

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Man racing shopping trolley through supermarket likes coles or woolworths

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ASX supermarket shares are roaring despite current lockdown restrictions being a drag on the economy.

Coles Group Ltd (ASX: COL) shares are up 6% in a month, the Woolworths Group Ltd (ASX: WOW) share price is 9.2% higher, and Metcash Limited is jumping 10.1%. The S&P/ASX 200 Index (ASX: XJO) is only up 1.64% during this time.

Let’s take a closer look.

Lockdowns, lockdowns, lockdowns

In what feels like a surreal and somewhat sadistic episode of The Oprah Winfrey Show, every state or territory bar Tasmania and the ACT has had some form of lockdown over the past 4 weeks. The most pronounced one is in Australia’s largest city, Sydney.

Today marks 4 weeks since New South Wales Premier Gladys Berejiklian placed the harbour city under stay-at-home orders. While the order is supposed to lift next Saturday, this looks exceedingly unlikely with the state declaring 136 new cases today – 70 of which were confirmed to not be fully isolating.

Victoria and South Australia are joining Sydney in lockdown fun at the moment. All 3 means over half the population of Australia’s movements are restricted.

During Australia’s first lockdown, we saw ASX supermarkets do exceedingly well under the orders.

Take Coles, for example. In its most recent half-year report, revenue for the supermarket jumped 8% to nearly $21 billion. Earnings Before Interest and Taxes (EBIT) spiked 12% to $1 billion. This includes a 14% increase in the supermarket divisions EBIT.

Woolworths saw its revenue leap 10.5% in its half-yearly to $35.8 billion. EBIT increased 9.4% to $10.5 billion. Woolworths management said Australian supermarkets grew above trend.

Metcash too; it saw a 12% increase in revenue for the period to $7.1 billion. Its EBIT rocketed 30% for the six months to $203 million.

The common thread through all 3 earnings reports was the impact COVID had on consumer demand. With supermarkets and bottle shops being some of the only stores allowed to trade during lockdown, these companies profited handsomely.

The share market is an expectations game

As Motley Fool’s own Scott Phillips says, the share price has a lot more to do with expectations than it can do with underlying finances.

While we don’t have any numbers out of these ASX supermarkets yet, we have history. History tells us that when we are all doing it tough in lockdown, the supermarket giants are just fine. Investors may very well expect this to occur again with the current lockdowns across the country. Increased revenues may mean increased dividend payments to shareholders, and that’s an enticing proposition for some.

ASX supermarket shares over the longer term

While all 3 mentioned ASX supermarket shares are flying this month, over the year the story is more mixed.

Coles is down 1.4%, Woolworths is up 21%, while Metcash has soared 47%. It should be noted with Woolworths, its share price took a hit when it demerged from its drinks business. The Endeavour Group Ltd (ASX: EDV) share price is up 7% this month too, a reflection of the fact liquor stores can continue to trade – even though Endeavour owns hospitality venues too.

The market capitalisations of these companies range from $4.1 billion for Metcash to nearly $50 billion for Woolworths.

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COLESGROUP DEF SET. 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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