Earnings preview: The key numbers to watch for Woolworths and Coles quarterlies

Highlights:

• Woolworths’ sales are expected to see a modest rise, but challenges in its Australian Food and Big W segments could affect profitability.

• Coles anticipates moderate sales growth with a focus on automation initiatives for cost savings and margin expansion.

• Despite Woolworths’ higher forward P/E ratio, its historically low valuation relative to Coles may present an intriguing market view.

Woolworths (ASX:WOW), a key player in the Australian retail sector, will release its results for the March quarter, offering insights into evolving consumer behavior and pricing trends. The supermarket giant is expected to report a modest increase in total sales, driven by growth in its Australian Food segment. However, key areas of concern include challenges faced by Australian Food and Big W, as well as rising supply chain costs. Investors will be closely watching these segments to gauge the effects of rising consumer prices and shifting preferences, especially given the retailer’s ongoing battle to manage profitability amid these pressures.

Woolworths’ Australian Food sales are expected to show a moderate rise, with a notable increase in its online supermarket business. The rise in online grocery shopping continues to reflect changing consumer habits, with more Australians opting to shop from home. This is a critical area to monitor for insights into the shift from physical stores to e-commerce in the grocery space. Additionally, Woolworths’ supply chain cost challenges are expected to be a key factor in its overall profitability, with increased costs anticipated in the latter half of the financial year.

The company's future P/E ratio currently stands higher than that of its competitor, Coles, signaling a difference in how the market is valuing both companies. Despite this, Woolworths is trading at a historically attractive valuation, which could suggest different perspectives on the stock's performance moving forward.

Coles: Automation and Cost Management at the Forefront

Coles, another leading name in the Australian retail industry, is also set to announce its quarterly results. The company has been focusing on automation and cost-saving initiatives as a way to streamline operations and boost margins. The Witron and Ocado partnerships have been at the heart of Coles’ efforts to modernize its operations, and investors will be eager to hear more about the progress in these areas. Coles has been increasingly reliant on automation to reduce operational costs and improve stock availability, which could offer a competitive advantage in the cost-sensitive retail market.

While Coles’ supermarket sales growth is projected to remain stable, the retailer has been focusing heavily on operational improvements to enhance its margins. This includes expanding its automation capabilities and making strategic moves to increase its market share in the online grocery space. Investors will be looking for updates on how well Coles has balanced the growth of its core business with ongoing initiatives to reduce costs and boost margins.

As with Woolworths, Coles is facing rising costs from suppliers and shifting consumer preferences, especially as demand for at-home products continues to rise. However, Coles’ investments in automation may position the company well to handle these challenges and drive further improvements in efficiency and profitability.

Sector Context: Performance Trends Among ASX Consumer Stocks

Both Woolworths and Coles are major players in the ASX Consumer Stocks sector, which has shown resilience in recent times. The broader retail sector has benefited from rising demand in the grocery and food service spaces, with both companies maintaining a strong market presence. Coles has notably outperformed Woolworths over the past 18 months, driven by strong results and operational improvements, while Woolworths has struggled with some underperformance in recent quarters. This has led to diverging trajectories for both companies, even as the broader market faces a challenging economic environment.

Investors will be closely monitoring how these retailers adapt to the changing landscape, particularly in terms of consumer preferences, online shopping trends, and supply chain dynamics. Both companies’ results will provide valuable insights into how they are managing challenges in the current economic climate and how well they are positioned to handle ongoing pressures. As these two retailers prepare to release their quarterly earnings, all eyes will be on their ability to maintain market share while managing costs and enhancing efficiency.