Welcome to Stockhead\u2019s Broking Bad \u2013 Where the analysts go bad, the companies get mad and the shareholders feel sad.<\/p>\n
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There\u2019s certainly been some angst around Aussie supermarkets lately.<\/p>\n
Cost-of-living pressures across this fine food-lovin\u2019 country remained tight, the government and consumer groups are in a constant state of apoplexy because supermarkets are mean, yet demand for stuff\u2026 er groceries and toilet paper and such essential items, hasn\u2019t missed a beat.<\/p>\n
Even if them supermarkets have been happily passing on the hit of toppy inflation and rising costs from suppliers to shoppers.<\/p>\n
Hey. TimTam\u2019s are 5 dollarbucks a pop. That\u2019s enough to trigger fisticuffs in Aisle 6 alone.<\/p>\n
UBS doesn\u2019t seem to mind too much, however. We\u2019ve included their Wednesday Upgrade to Buy from Neutral just because of the fury it might inspire.<\/p>\n
At JPMorgan, however, the feeling is less than mutual. JPM brokers are altogether feeling more cautious as the political spotlight of recent times continues to draw some unwanted attention.<\/p>\n
The duopoly-shaped Aussie supers have attracted no less than x3 major inquiries into pricing and competition, which JPM notes has pretty much stirred up a negative news spiral, and that\u2019s had a direct hit on both Woolworths\u2019 (ASX:WOW)<\/strong><\/a> and Coles Group\u2019s (ASX:COL)<\/strong><\/a> valuation multiples, although earnings impacts are harder to get a line on.<\/p>\n While the major structural changes many have called for look pretty unlikely right now, JPMorgan do see a prospect for several smaller but meaningful changes, which they reckon could put a squeeze on gross margins and store growth.<\/p>\n That according to the brokers, is likely to embed earnings risk from FY26.<\/p>\n The more tangible and near-term impact on earnings is due to both companies initiating some genuine investment in value, resulting in a more competitive pricing and promotional environment.<\/p>\n \u201cThe noise around this is likely to continue into next year\u2019s Federal Election \u2013 Woolworths and Coles have used their market position to drive gross margins and stabilise EBIT margins, prioritising shareholders at the expense of suppliers and customers.\u201d<\/p>\n JPM have been good enough to trace out a forward-looking Supermarkets Potential Slapdown schedule:<\/p>\n 1. \u00a0 \u00a0 \u00a0 7 May 2024 \u2013 Senate Inquiry final report<\/strong><\/p>\n 2. \u00a0 \u00a0 \u00a0 30 June 2024 \u2013 Food & Grocery Code of Conduct final report due<\/strong><\/p>\n 3. \u00a0 \u00a0 \u00a0 August 2024 \u2013 ACCC Supermarket Inquiry interim report<\/strong><\/p>\n 4. \u00a0 \u00a0 \u00a0 1 September 2024 \u2013 Woolworths leadership transition to Amanda Bardwell<\/strong><\/p>\n 5. \u00a0 \u00a0 \u00a0 February 2025 \u2013 ACCC Supermarket Inquiry final report<\/strong><\/p>\n 6. \u00a0 \u00a0 \u00a0 May 2025 \u2013 Federal election (expected)<\/strong><\/p>\n \u00a0<\/p>\n It\u2019s a packed regulatory\/naughty stick schedule for sure.<\/p>\n The intensity of negative news flow into the Federal election is difficult to predict, according to JPM.<\/p>\n Their thinking is that it\u2019s quite de rigeur for all political parties to kick the biggies where possible during a cost-of-living crisis.<\/p>\n However, JPM says the potential exists for a new issue to emerge over the next 12 months, reducing the risk around further de-rating.<\/p>\n Qantas began outperforming after management change and the emergence of supermarket pricing issues in Nov\/Dec 2023. The potential for political and media focus to shift could occur at any time.<\/p>\n With WOW and COL\u2019s gross margin expansion \u201camongst the best in the world,\u201d it is clear both have benefited from their market position and pricing power.<\/p>\n While delivering on near-term financial targets, JPMorgan believe Woolworths and Coles may have got the stakeholder balance wrong during said cost-of-living crisis, which has impacted value perception and driven a political\/regulatory cycle.<\/p>\n \u201cWe have begun to see the early stages of this, with gross margin pressure driving earnings downgrades for Woolworths (-2.1% in FY24, -3.8% in FY25 and -6.3% in FY26) and Coles (-1.5% in FY24, -2.7% in FY25 and -6.2% in FY26).\u201d<\/p>\n JPM says the sector has already underperformed significantly \u2013 Woolworths and Coles have de-rated heavily over the past 12 months, however, much of this was before the supermarket inquiries and potential regulatory impacts were mentioned.<\/p>\n As a result, JPMorgan remain cautious on the sector, and for WOW in particular given the CEO transition and the potential reset of expectations given regulatory\/political pressure, sales underperformance, and current margin levels.<\/p>\n Throwing that cautioun to the wind is UBS, which this week rated COL as an Upgrade to Buy from Neutral.<\/p>\n An effusive UBS reckons Coles Group is \u2018bringing home the bacon\u2019 after some cracking third quarter supermarket sales results.<\/p>\n Sales for the quarter were right on UBS forecasts of an impressive 5.1% growth. They were also well above the consensus of 4.5%.<\/p>\n Liquor sales were lower than market expectations but slightly better than the broker\u2019s estimate. No one\u2019s going to go broke selling cheap grog, the broker didn\u2019t say, but probably didn\u2019t need to.<\/p>\n UBS is expecting positive tailwinds for the company, including gross margin improvements post the hullaballoo around last fiscal\u2019s apparent shoplifting plague; cost savings from automated logistics mob Witron, alongside better earnings momentum.<\/p>\n The analysts at UBS raise Coles\u2019 FY24 Earnings Per Share by 6.2% and 8.7% for FY25.<\/p>\n Rating\u00a0is upgraded to Buy from Neutral\u00a0on the\u00a0improved outlook and the potential for a higher valuation.<\/p>\n UBS has also lifted the COL Target Price (TP) to $18.25 from $17.50.<\/p>\n \u00a0<\/p>\n A quick note:<\/strong><\/em><\/p>\n As I write,\u00a0 Woolworths says total group sales for the March quarter were at A$16.8bn, slightly ahead of Jefferies\u2019 estimates of $16.62 billion, and a 2.8% rise from a year earlier.<\/p>\n Naturally outgoing and literally outgoing CEO CEO Brad Banducci warned shareholders of the outrageous caution being displayed by Aussie consumers and the cost-of-living pressures they drag around with them.<\/p>\n Forget moderating inflation, said the CEO who can out a fire by setting himself on fire (see recent ABC interview), it\u2019s just nitpicking customers saving pennies which has put a slight drag on sales from WOW\u2019s biggest segment, Australian Food.<\/p>\n Total sales for the company\u2019s Australian Food business rose just 1.5% to A$12.58 billion ($8.21 billion) for the 13 weeks period ended March 31, compared with a 5.1% at Coles, suggesting, as UBS implied \u2013 Woolies\u2019 smaller rival is quietly closing the distance on the nation\u2019s largest supermarket operator.<\/p>\n <\/span><\/p>\n The post Broking Bad: Clean up on Aisle 6 as ASX supermarkets unnerve JP Morgan; excite UBS<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"