Coles’ (ASX: COL) core supermarket business is thriving, with sales growing by 5% in the first quarter of fiscal 2026. By sales channel, online is vastly outperforming its physical supermarket network as it ramps up two dedicated automated warehouses.

Why it matters: Coles supermarkets are taking market share. The key driver is strong grocery volume growth from both existing and new customers, with food price inflation contributing only marginally. The solid performance is carrying over into October, but Woolworths is showing signs of life.

  • We expect supermarket sales to increase by more than costs, to support margin expansion. We estimate this operating leverage, together with lower supply chain costs, to increase EBIT margins by 20 basis points to 5.4% in fiscal 2026.
  • However, further margin improvement is unlikely beyond fiscal 2026. We anticipate Woolworths will regain its competitive edge, preventing Coles from driving significant operating leverage. Also, the structural shift to less profitable online sales poses a long-term margin headwind to both.

The bottom line: We maintain our $16.50 fair value estimate on no-moat Coles; the shares are significantly overvalued. We think a P/E of 25, based on our unchanged fiscal 2026 underlying EPS estimate of $0.87, is too expensive for a relatively low-growth, defensive stock, yielding about 3.3%.

  • We think the market is anticipating Coles’ supermarket margins to increase significantly beyond fiscal 2026. All else equal, we need to assume supermarket EBIT margins of 6.8% for our valuation to match current share prices. We expect competition to restrain Coles’ margins at 5.4% in the long term.

Wide-moat Woolworths (ASX: WOW) is more compelling. In the near term, we expect Coles to outperform, but this advantage is expected to gradually wane. We anticipate Woolworths’ price cutting will ultimately lure shoppers back and level the playing field. From fiscal 2027, we forecast both majors to increase sales by 4% per year.

Woolworths: First-quarter sales growth modest, but it is starting to win back customers

Woolworths’ first-quarter sales performance missed its growth aspirations. Sales in the core Australian food business grew only 2% from last year. Within the Australian and New Zealand supermarket segments, online sales are driving virtually all the sales growth.

Why it matters: Its near-term focus is on reaccelerating sales momentum by discounting in different forms: more weekly promotions, more online-specific offers, and more points for its loyalty program members. While its supermarkets are still underperforming Coles’, initial signs are positive.

  • Its customer net promoter score, a leading indicator, is now 50, up 3 points quarter on quarter. Australian food sales momentum improved slightly in October 2025, rising 3%. However, we expect it to take most of fiscal 2026 for Woolworths to close the sales growth gap to Coles.
  • Even so, strong e-commerce growth poses a structural headwind to margins. Australian online supermarket sales jumped 13%, but in-store sales were flat. Online sales have a lower margin than in-store sales due to picking and packing costs, along with delivery costs for those not collected by shoppers.

The bottom line: We maintain our $30.50 fair value estimate for wide-moat Woolworths. Shares are undervalued, trading in 4-star territory. We think the market expects Coles to hold on to its operational outperformance for longer than we do.

  • We believe restoring customer price trust will take some time, weighing on sales performance for most of fiscal 2026. However, we expect Woolworths’ wide moat, based on a structural cost advantage over Coles, to enable it to cut prices more than Coles and ultimately lure shoppers back.

Between the lines: We expect Australian food margins to improve slightly in fiscal 2026, by 10 basis points to 5.5%. We estimate the segment’s EBIT to increase 5% to $2.9 billion, accounting for 90% of group operating earnings. Fiscal 2026 guidance stands at mid-to-high single-digit EBIT growth.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

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.