Woolworths (ASX:WOW) and Coles (ASX:COL) could face a margin shock

The Woolworths Group Ltd (ASX: WOW) share price and Coles Group Ltd (ASX: COL) share price could be in for…

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The Woolworths Group Ltd (ASX: WOW) share price and Coles Group Ltd (ASX: COL) share price could be in for a bumpy ride.

These COVID-19 ASX darlings could suffer a margin squeeze that’s a lot worse than the market expects.

That’s the prediction of analysts at Macquarie Group Ltd (ASX: MQG). The broker is warning that census forecasts are set too high!

The Woolworths share price and Coles share price have benefitted from panic buying of household goods during the pandemic.

While their shares have retreated from their highs recently, they are still widely held by many investors.

But COVID isn’t the only reason why some investors have stocked up on these ASX supermarket shares.

Tailwinds for the Woolworths share price and Coles share price

Their expansion into online shopping and ambitious warehouse automation projects to cut costs have added a spring in their step.

The market’s optimism in the industry’s strong earnings before interest and tax (EBIT) margin may be misplaced.

Consensus downgrades ahead?

“We note that consensus is counting on both COL and WOW to continue to deliver operating leverage in outer years with incremental margins ranging from 7-9%, well ahead of food EBIT margins ~5-5.5%, which we believe is overly ambitious,” said Macquarie.

“Our supermarket EBIT margins are below the street as we believe automation margin gains are likely to be competed away quickly.”

If the broker’s dour predictions come to pass, the Coles share price and Woolworths share price could soon be hit by consensus downgrades.

Macquarie picks Coles share price over Woolworths share price

But it’s Woolies that could be worst for wear. Macquarie favours the Coles share price over Woolworths and Metcash Limited (ASX: MTS) share price.

This is because the Coles share price is trading at around a 7-point valuation gap to the Woolworths share price. Macquarie reckons that the discount is unwarranted.

The broker has an “outperform” recommendation on Coles with a 12-month price target of $19.80.

In contrast, Macquarie rates the Woolworths share price and Metcash share price as “neutral”. Its 12-month target price on the shares are $41.50 and $4.10, respectively.

Margin pressure leaking to other retailers

However, it isn’t only the supermarkets that are facing margin pressure. Several ASX retail shares are also likely to report a squeeze in the coming months due in part to a five-fold increase in container shipping costs.

But the impact may not be as severe. Unlike ASX supermarket shares, the market is already pricing in skinnier margins for a range of ASX discretionary retailers.

These include the Wesfarmers Ltd (ASX: WES) share price, Harvey Norman Holdings Limited (ASX: HVN) share price and JB Hi-Fi Limited (ASX: JBH) share price.

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. 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, Harvey Norman Holdings Ltd., Macquarie Group Limited, and Wesfarmers Limited. 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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