There is a growing storm of controversy around Coles and Woolworths as they face intense scrutiny over price hikes and supplier pressures in a Senate inquiry. This raises an interesting question as to whether investors should cut ties with these corporate giants or whether there is the prospect of finding a gem that is waiting to be unearthed writes Wealth Within chief analyst Dale Gillham.
Australian households are grappling with the relentless surge in living costs through higher interest rates and the burden of inflated supermarket bills. While this weighs heavily on the average family, there could be a silver lining for investors. These escalated supermarket prices may translate into healthier profits and potentially signal a bright future for both Coles Group Ltd and Woolworths Group Ltd.
Flashback to August 2023 when Woolies and Coles announced profits of 4.6% and 4.8%, respectively, over the past year. Those numbers might not make your jaw drop, but here's the kicker: both Coles and Woolies have seen their earnings increase year on year since 2020. All of this has occurred during a pandemic recovery and inflation storm.
You would think that with shoppers spending less, earnings would decrease, but the opposite has happened. So, how did they pull it off?
There can really only be two reasons: squeezing suppliers for lower costs while stacking the supermarket shelves with higher-margin products.
To buy or not to buy?
Interestingly, despite Woolworths' earnings uptick, its share price has taken a nosedive, with the stock down approximately 25% from its peak in August 2021. Worse, from a technical perspective there is no indication the downward trend will halt anytime soon.
However, here's the silver lining I was talking about. Woolworths' share price has a track record of bouncing back splendidly after corrections in the range of 20 to 30%. So, if the company can keep the profit train rolling despite a sluggish economy, this stock has the potential to outperform over the longer term.
Coles share price is also down about 20% from its peak in August 2022. In contrast to Woolies, however, its share price has been rising since October 2023. If this trend can continue, I see the potential for the price to reach around $19 in the medium to long term, which provides a fantastic opportunity for savvy investors and traders.
Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au