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Australia's leading supermarket chains, Woolworths and Coles, are set to face a challenging economic environment as they prepare to release their annual earnings reports. High mortgage rates and persistent inflation have led consumers to tighten their spending, which is expected to be reflected in the upcoming financial results.
Economic Pressures and Consumer Behavior
Decade-high interest rates and inflation rates that remain above the central bank's target have prompted consumers to be more cautious with their spending. Analysts have highlighted that this cautious spending is likely to impact the earnings of Woolworths and Coles, which collectively account for two-thirds of all grocery spending in Australia.
According to UBS analysts, consumers are becoming increasingly selective, opting for lower-priced items and increasing at-home consumption. This shift in consumer behavior is a direct response to the ongoing cost-of-living crisis, which is expected to weigh heavily on the supermarket chains' financial performance.
Forecasts and Expectations
- Coles: Scheduled to report its results on August 27, Coles is expected to show some resilience. Analysts forecast that Coles will experience a rebound in underlying earnings margin, benefiting from initiatives aimed at connecting brands with customers. Net profit after tax (NPAT) for fiscal 2024 is anticipated to be AU$1.10 billion (approximately $737.99 million), slightly higher than the previous year’s AU$1.04 billion.
- Woolworths: Set to release its results on August 28, Woolworths is projected to face more significant challenges. Analysts expect NPAT before significant items to decline to AU$1.67 billion from AU$1.72 billion the previous year. The expected contraction in earnings margin is attributed to increased business costs and investments in supply chain improvements. Additionally, Woolworths may announce a special dividend from the proceeds of its stake sale in Endeavour Group, which could provide some relief to shareholders.
Market Analysis and Sentiment
Kyle Rodda, senior financial market analyst at Capital.com, suggests that both supermarket chains will face headwinds over the next 12 months due to the persistent high-rate environment. The softening of consumer demand is likely to be a key factor reflected in their earnings.
Tim Waterer, chief market analyst at KCM Trade, anticipates that profit margins for the major supermarket chains will be closely scrutinized. The ongoing cost-of-living pressures will likely keep margin performance under the spotlight.
