Buy one, sell the other: Goldman's verdict on Coles vs. Woolworths share prices

One stock is set for a 26% share price gain over the next 12 months while the other is destined for a fall.

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The Woolworths Group Ltd (ASX: WOW) share price closed on Tuesday at $31.95, up 0.28% for the day, while the Coles Group Ltd (ASX: COL) share price finished the session at $16.30, down 0.18%.

These two mega supermarket businesses command a 65% market share of the Australian grocery sector.

Woolworths has a 37.1% share and Coles has a 27.9% share, according to figures from Statista.

Their market power is under scrutiny right now as the Federal Senate conducts an enquiry on retail prices while the Australian Competition and Consumer Commission also runs its own.

Despite Woolworths and Coles enjoying duopoly status, top broker Goldman Sachs reckons only one of these blue-chip ASX 200 consumer staple shares is a buy while the other is a sell.

Let's dig into the reasons.

Woolworths share price trading 'below its historical average'

Goldman has a buy rating on Woolworths with a 12-month share price target of $40.40.

This implies a potential 26% upside for investors who buy Woolworths shares today.

The Woolworths share price has tumbled 18.1% over the past 12 months. Last Friday, the Woolworths share price hit a new 52-week low of $31.25 per share.

The last piece of price-sensitive news out of Woolworths was its FY24 half-year results on 21 February.

The supermarket giant reported a 4.4% increase in revenue to $34.64 billion. However, losses after significant items came in at $781 million compared to a profit of $845 million in 1H FY23. Most of those losses related to the $1.5 billion non-cash write-down of Woolworths' New Zealand business.

On top of that was the surprise news that CEO Brad Banducci had quit. Woolworths declared a fully franked interim dividend of 47 cents per share, up 2%.

The Woolworths share price fell 6.61% on the day the report was released.

Goldman analysts Lisa Deng and James Leigh explain their buy rating:

We are Buy rated on the stock as we believe the business has among the highest consumer stickiness and loyalty among peers, and hence has strong ability to drive market share gains via its omni-channel advantage, as well as its ability to pass through any cost inflation to protect its margins, beyond market expectations.

The stock is trading below its historical average (since 2018), and we see this as a value entry level for a high-quality and defensive stock.

However, Deng and Leigh outline some downside risks for Woolworths:

Worse AU food volumes, increase in competitive intensity, online sales underperformance, retail media benefits not materializing, poor management of cost inflation. Worse than feared ACCC inquiry outcomes.

Coles shares are a sell

Goldman has a sell rating on Coles with a 12-month share price target of $15.10.

This implies a potential 7% downside for investors who buy Coles shares today.

The Coles share price has fallen 11.2% over the past 12 months.

The last lot of price-sensitive news out of Coles was also its 1H FY24 results on 27 February.

Coles reported that sales revenue was up 3.7% to $22,216 million but earnings before interest, tax, depreciation and amortisation (EBITDA) was down 2.8% to $1,847 million.

The profit after tax came in 8.4% lower at $589 million. The company declared a flat fully franked interim dividend of 36 cents per share.

The Coles share price finished 5.5% higher on the day of the report.

Deng and Leigh explain:

In our opinion, COL has under-invested in its digital transformation and omni-channel strategy, which is the primary reason for structural market share loss.

Even though the company is stepping up its investments in supply chain, we would like to see the company better illustrate its end-to-end digital strategy including sourcing, warehouse/distribution, merchandising, consumer data/analytics and loyalty to ultimately drive ARPU and market share gains together with cost efficiencies.

We expect COL to report lower comps sales and EBIT margin growth in FY24/25 vs key competitor WOW. Potential further delays to the Witron/Ocado project delivery and over-budget would be perceived negatively by investors and could result in both EPS revision and valuation compression downwards.

However, the analysts can see some upside risks, including:

Better-than-expected market share due to more value proposition vs. WOW. Faster ramp up of Ocado/Witron resulting in earlier and higher cost efficiency in FY24/FY25 vs. expectations. Better than feared ACCC inquiry outcomes.

Head to head over 5 years

Over the past five years, the Coles share price has appreciated faster than Woolworths.

The Woolworths share price is up 17.9% over the past five years while Coles shares are up 29%.

Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has no position in any of the stocks mentioned. 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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