Woolworths and Coles 24 earnings to show challenging outlook for supermarkets By Reuters

By John Biju and Sneha Kumar

(Reuters) – Earnings by Australia’s top supermarket chains are likely to show that tight spending presents a challenging outlook for Woolworths and Coles as consumers grapple with painfully high mortgage rates and persistent inflation.

Interest rates at a decade high and stubborn inflation that continues to exceed the central bank’s target range have prompted consumers to watch their spending, analysts have warned.

The results will show the impact of a prolonged cost-of-living crisis on businesses, which account for two-thirds of every Australian dollar spent on food and are closely watched as barometers of the wider economy.

Consumers are becoming more discerning by trading down on items such as groceries, choosing items at lower prices and consuming more at home, UBS analysts wrote in a note.

Woolworths and Coles “face headwinds over the next 12 months as the economic outlook is unlikely to improve due to the higher rate environment,” said Kyle Rodda, senior financial market analyst at Capital.com.

Declining consumer demand should be reflected in their earnings, he added.

Woolworths will report annual results on August 28, while smaller rival Coles will report on August 27. On average, analysts expect Coles to do better.

Coles said it expected higher volume growth after a rise in supermarket sales in the third quarter, unlike Woolworths, which saw weak grocery sales.

“With cost of living pressures remaining a hot topic, I expect the profit margins of major supermarket chains to be under the microscope again,” said Tim Waterer, chief market analyst at KCM Trade.

Jefferies analysts see core profit margin expansion for Coles, recovering from a period of margin contraction the previous year and benefiting from initiatives to connect brands with customers.

Meanwhile, Australia’s food core profit margin for Woolworths is expected to contract due to increased business costs and supply chain investment.

Net profit after tax (NPAT) from continuing operations for the 2024 fiscal year is expected to reach $1.10 billion ($737.99 million) for Coles, slightly higher than $1.04 billion the previous year, according to estimates to Jefferies.

However, NPAT before material items for Woolworths is expected to fall to $1.67 billion from $1.72 billion last year.

Woolworths could also announce a special dividend alongside its annual results from the proceeds from the sale of shares in liquor store and pub operator Endeavor Group, according to analysts.

($1 = 1.4905 Australian dollars)