Although Coles Group Ltd (ASX: COL) shares are down slightly by 0.94% over the past year, this is a huge outperformance over the shares of its competitor Woolworths Group Ltd (ASX: WOW), which have fallen by 13.39%.
The rivalry between Coles and Woolworths has long been an interesting feature of the Australian retail landscape. Investors watch these two giants as they compete for market share, customer loyalty, and financial supremacy.
Recently, it seems undeniable that Coles has been making waves by outperforming Woolworths in terms of market share and its share price performance.
Can Coles keep up this momentum and continue to outshine Woolworths?
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Market share game
Coles has impressed investors in many areas this year. According to the 2024 Supermarket Supplier survey conducted by UBS, Coles leads Woolworths in 15 out of 26 subcategories, up from 14 in January, as The Australian summarised.
This is in line with the company's strong 3Q FY24 sales update in April. Coles reported a 5.1% growth in its supermarket sales, with comparable sales growth of 4.2%. In contrast, Woolworths' supermarket sales in the March quarter only increased 1.5%.
Analysts at Morgans believe that Coles' strong supermarket sales will continue, as my colleague James highlighted. They said:
While Liquor sales remain soft, we expect the core Supermarkets division (~92% of earnings) to continue to be supported by further improvement in product availability, reduction in total loss, greater in-home consumption due to cost-of-living pressures, and population growth.
On the other hand, Goldman Sachs is bullish on Woolworths, giving it a conviction buy rating. As my colleague James highlighted, analysts at Goldman anticipate that strong consumer loyalty will help Woolworths drive market share gains.
Valuation argument
Based on S&P Capital IQ estimates for FY25, the two retail giant shares are valued as follows.
- Coles shares are valued at a price-to-earnings (P/E) ratio of 22x
- Woolworth shares are valued at a P/E ratio of 24x
While Coles' valuation is still cheaper than that of Woolworths, the valuation gap has narrowed from a year ago. Over the last five years, their forward P/E multiples ranged between:
- 16x to 26x for Coles Group
- 21x to 32x for Woolworths Group
As my colleague Sebastian rightly pointed out, Woolworths shares are still looking cheap compared to their historical trading range despite their rebound from the low in May.
Whether Coles shares will continue to outperform Woolworths will largely depend on its market share direction.
Therefore, the key question might be, "Where do you intend to do your grocery shopping next week?"
