Canberra Times – Australasia: Petrol deals push sales - Woolworths versus Coles: the battle of the supermarket giants: “Coles Myer acknowledged the strength of this strategy by forming an alliance with Shell to provide a similar offer in late 2003.” (ShellNews.net)
Sep 12, 2004
THE grocery retail sector remains one of our preferred defensive exposures, providing relatively stable earnings and distribution growth. Within this sector Woolworths and Coles Myer dominate, but investors considering either of these companies need to take into account the operations of each company as a whole and their respective strategies.
Woolworths has interests in supermarkets (Safeway and Woolworths), variety stores (Big W), liquor (Dan Murphy, BSW) and Electronics (Dick Smith and Tandy). Coles Myer similarly has supermarkets (Coles and Bi-Lo), variety stores (K-mart and Target) and liquor (Vintage Cellars and Liquorland) but also owns Myer and Officeworks.
While we acknowledge the strength of both Coles' and Woolworths' respective food and liquor franchises, our investment case for Woolworths is based upon its more defensive operational profile, given its lower exposure to non-food retail (20 per cent compared with 35 per cent of Coles Myer sales) and its strong lead in achieving efficiency gains to drive superior long-term returns relative to the sector.
However, in the short-term, the most significant driver of the grocery retailers' share prices remains their quarterly rates of sales growth. While cost savings ultimately enable a retailer to drive sales growth by returning these benefits to customers through lower prices, a far greater recent influence has been that of the grocery retailers selling petrol.
Woolworths began the rollout of its petrol offer (grocery shoppers receive a discount on petrol at Woolworths outlets if they spend over a certain amount at the supermarket) in late 1996, and this provided a boost to sales growth over that period. Coles Myer acknowledged the strength of this strategy by forming an alliance with Shell to provide a similar offer in late 2003.
The rollout of Coles' petrol offer has not only seen its sales growth soaring to multi-year highs, but has also resulted in substantial pressure on Woolworths' sales growth. This is because the wider availability of petrol discount offers means that consumers who previously could only go to Woolworths for this discount are returning to Coles' supermarkets.
We expect that this trend is likely to continue for the next couple of quarters. Like Woolworths over the last few years, Coles' food and liquor sales have benefited from the rollout of its petrol discount offer (which began in February 2004). As a result, we believe Coles' sales numbers in coming quarters (the first and second quarters of fiscal 2005) will look relatively strong, because they will be compared to prior-year quarters in which the company did not provide the fuel offer. Further, we expect a more neutral competitive environment at this time, as Woolworths' rolls out its Caltex petrol alliance into 2005.
In our opinion, this operational strength is largely reflected in Coles' share price, with the stock trading on a price/earnings ratio of 18.5x GSJBW (Goldman Sachs JB Were) forecast fiscal 2005 earnings. A PER is the price of the share, divided by the earnings of the share. Hence, the lower the PER, the relatively cheaper is the stock. In comparison Woolworths is trading on a PER of 15.5x GSJBW fiscal 2005 forecast earnings.
We believe that Woolworths' long- term 10-15 per cent annual earnings per share growth targets will continue to be achieved through substantial and sustainable cost savings, capital management and market share growth. We believe that the market has begun to recognise this strategy, with Woolworths' share price running strongly since its full-year result, in which the company demonstrated its ability to drive sales growth despite the strong competitive environment.
While we consider that both of the major grocery retailers will dominate the Australian market more fully in the long-term, we believe there remain several medium-term risks to Coles' earnings profile. We believe there are risks to Coles' non-food earnings growth and we forecast that 35 per cent of Coles' fiscal 2005 earnings will come from non-food sales (eg. Myers, Target, Kmart).
Hence, while we believe that both retailers will fare well over the next six months, we retain a preference for Woolworths on a long-term view and are comfortable to continue building positions in the stock.
Goldman Sachs JBWere and/or its affiliates may hold securities in or have financial and advisory relationships with companies covered in this article. This article does not take into account the financial circumstances of any particular person. You should assess whether the information in this article is appropriate in light of your own financial circumstances or contact your financial adviser.