Woolworths’ WOW underlying NPAT collapsed by 17% in fiscal 2025. In the core supermarkets business, rising wages, industrial action, elevated supply chain costs, and price cuts weighed heavily on EBIT, which fell 11% on a normalized basis. The smaller Big W and New Zealand businesses also disappointed.

Why it matters: Its result contrasts strikingly with that of Coles. Its supermarket sales growth and margin trajectory are underperforming its key competitor. This performance gap is set to continue in fiscal 2026. Shares sold off heavily on the muted outlook, falling 15%.

  • We now expect underlying fiscal 2026 EBIT to grow by 9% to AUD 3.0 billion, 9% lower than our prior forecast. We expect price cuts to improve perception of value but weigh on supermarket gross margins. We also see softer sales growth persisting near term and struggle to offset a rising cost base.
  • Woolworths is losing market share to Coles. Restoring customers’ price trust is key to closing the sales growth gap to Coles. We expect this strategy to work and for its sales growth to catch up to Coles by fiscal 2027, before both companies grow grocery sales by 4% longer term.

The bottom line: We maintain our AUD 30.50 fair value estimate for wide-moat Woolworths. While we downgrade our medium-term forecasts, our long-term EPS estimates are broadly unchanged. We think restoring customer price trust will take some time, but we expect it to be regained by end fiscal 2026.

Shares are now undervalued, in 4-star territory. We think the market is expecting Coles to hold on to its operational outperformance.

  • However, we expect Woolworths’ wide economic moat, based on a structural cost advantage over Coles, to enable it to drop prices more than Coles and ultimately lure back shoppers.

Between the lines: It is also lagging Coles in terms of cyclically lumpy supply chain spending. Both supermarkets are modernizing their existing warehouse networks and adding online order fulfilment centers to meet demand.

Woolworths is one of Australia’s largest retailing groups, operating supermarkets and discount department stores. Its market capitalization is around AUD 35 billion, with annual sales of around AUD 70 billion.

Woolworths has a wide economic moat characterized by an extensive supermarket store network, serviced by an efficient supply chain operation coupled with significant buying power. It operates in the very competitive supermarket and discount department store segments of the retail sector. Intense competition has taken its toll on margins. Management has reset prices lower to drive foot traffic and increase basket sizes. Volume growth is vital for maximizing supply chain efficiencies.

To contextualize Woolworths’ enormous scale advantage, its Australian food sales of over AUD 50 billion represented about 12% of total Australian retail sales in fiscal 2025.

Key risks involve increased competition in the Australian retail landscape and reduced consumer spending. The change in ownership of Australia’s largest retailer, Coles, in 2007, was the catalyst for increased price competition by both groups to win market share, while the entry of Amazon Australia could raise the competitive bar in the future. The aggressive expansion of low-cost discounter Aldi has altered and further segmented the grocery sector and increased competitive pressure. A reduction in the rate of growth in consumer spending would affect revenue growth and could affect operating margins. Increased frugality and heightened deflationary pressures would crimp top-line sales growth, and relatively high fixed-cost leverage would affect margin.

However, Woolworths is well positioned to withstand cyclically weak consumer spending. Woolworths is a defensive stock, with food retailing generating most of group revenue and profit, a solid balance sheet, and a wide moat surrounding its economic profits.

Bulls say

  • Woolworths’ dominant position in the supermarket sector is entrenched and, coupled with first-class management, suggests it can maintain leadership in the sector.
  • Woolworths’ operating leverage could lead to a rebound in operating margins, driving cash generation that funds expansion and acquisitions while allowing capital-management initiatives.
  • The refurbishing of the existing supermarket fleet and rollout of revised store formats with significantly improved service, convenience, and product offerings could increase store productivity and lead to higher sales growth.

Bears say

  • Strong online sales growth reduces store productivity and could weigh on operating margins at some retailers, including Woolworths.
  • Increased competition from Coles, an aggressive Aldi, and independents serviced by Metcash is likely to keep competitive pressures elevated and constrain operating margins.
  • Having exited petrol retailing as well as the liquor and hotels categories, Woolworths is less diversified and depends on the fortunes of its supermarket businesses in Australia and New Zealand.

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Terms used in this article

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.