WESFARMERS’ supermarket chain Coles is expected to again outpace arch-rival Woolworths in terms of sales growth for the fourth quarter, after Woolies boss Michael Luscombe warned of tough conditions in the retail sector.
Woolworths this week reported a 4 per cent increase in sales for the June quarter, excluding the benefit of new store openings, but Mr Luscombe said the company had resorted to steep discounts of as much as 50 per cent as customers increasingly traded down to cheaper products.
Merrill Lynch analyst David Errington said that the volume of sales growth for products not sold on promotional discounts was very low, and noted that further discounting would probably dent Woolies’ future profitability.
In contrast, Macquarie analyst Greg Dring said Coles appeared to be moving to an everyday low-pricing model that would be less damaging to margins than steep discounts on individual items and would help “win customer trust with consistent low pricing”.
Errington has forecast Coles to report comparable sales growth of between 5.5 and 6 per cent when Wesfarmers reports fourth-quarter sales for its retail businesses next Thursday.
This would mark the ninth straight quarter of outperformance by Coles on same-store sales growth, although Luscombe has pointed out that with a revenue base only two-thirds as large as Woolworths’ $36 billion Australian food and liquor division, Coles’s performance is measured against a lower benchmark.
However, Goldman Sachs analyst Phil Kimber said Coles, which is almost four years into a five-year turnaround program that began with Wesfarmers’ 2007 purchase of the Coles retail group, now had better growth potential than Woolworths.
“It has already completed most of the step-change improvements over the past five to seven years — thus, given the moderating growth profile in its key business, Woolworths’ group earnings can be more influenced by its other businesses, which are more volatile, or new initiatives, with a higher risk profile,” he wrote in a report to clients.
Commonwealth Bank analyst Andrew McLennan took heart from Luscombe’s refusal to fine-tune Woolies’ earnings guidance, essentially confirming forecasts for net profit growth of 5-8 per cent.
Source – The Australian