Under the Spotlight AUS: Woolworths (WOW)

Woolworths ($WOW) CEO Amanda Bardwell would have thought all her Christmases came at once when she became the boss of Australia’s largest supermarket chain in September.

Instead, it’s been a baptism of fire. Woolworths found itself on the wrong side of politicians, the competition watchdog, unions, and most worryingly, customers in 2024. The cost-of-living crisis fuelled consumer resentment as the squeeze on household budgets played out at supermarket registers. Legal action by the Australian Competition and Consumer Commission (ACCC) and a recent union strike made a bad year worse. 

It’s not how the company would have wanted to celebrate 100 years since opening its doors as Woolworths Stupendous Bargain Basement in Sydney. Investors haven’t been pleased either. One of Bardwell’s first acts was downgrading the retailer’s first half earnings forecast. The stock is down 18% in 2024, while shares in arch-rival Coles Group ($COL) are up 16%. 

Unwanted scrutiny

Bardwell will want to reset Woolworths’ reputation in 2025. That may be easier said than done. The ACCC’s legal action against Woolies and Coles will keep supermarkets in the public glare during an election year. 

The competition watchdog claims Woolworths breached the Australian Consumer Law by misleading shoppers through supposedly discounted pricing on common supermarket items. It is alleged some prices were raised by at least 15% and then placed in Woolworths’ ‘Prices Dropped’ promotions. The ACCC cites conduct involving 266 products over the course of 20 months.

Exhibit A in the ACCC’s case is the Oreo Family Pack. It has a chart showing a quick spike in Woolworths’ price, followed by a ‘discounted price’ much higher than the original. The list of other popular household products leaves Woolies looking like it profited while families were doing it tough. Dolmio pasta sauces, Palmolive dishwashing liquid, Twisties, Uncle Toby’s muesli bars and even Tim Tams were all allegedly subjected to misleading discounts. Investors take note: each breach of the Australian Consumer Law can incur a penalty of up to $50m. 

Despite releasing its interim report in September, the regulator has made it clear that it will not relent in its analysis of prices until the final supermarket inquiry report is handed down in February. Beef, chicken, bananas, eggs and milk are among 14 key products that are under the microscope until then. The findings will come as both political parties gear up for an election and look for someone to point the finger at for cost-of-living pressures. 

Christmas wishes 

Bardwell is counting on a bumper Christmas shopping season, and investors will be keen to see Woolworths fully capitalise on it. The company needs it more than ever after strikes at distribution centres in NSW and Victoria wiped $140m from its Australian Food unit’s sales and cut EBIT by $50-$60m. It’s another hit for shareholders after H1 EBIT guidance for the Australian Food business was cut to $1.48b-$1.53b in October due to discounting, down from $1.595b the prior year. Consensus forecasts indicated H1 earnings above $1.6b. 

Analysts are wary supply disruptions may benefit Coles during Christmas, as Woolies scrambles to restock its distribution centres and supermarket shelves. Coles’ comparable supermarket sales growth has outpaced Woolworths’ – in Q1 FY25, it was 2.4% vs 2.3% respectively. This was achieved through promotion of Coles home brands and fewer but deeper discounts on key staples. Woolies margins have been squeezed as it cut prices to attract shoppers, with many downgrading to cheaper – and lower margin – products. Woolies Australian Food business accounted for $13.6b of total Q1 sales of $18b. 

Woolworths’ bumpy year is reflected in its valuation, which has lost much of the premium it once had over Coles. Woolies shares now trade at around 24x forecast FY25 earnings versus 23x for Coles. However, some analysts argue the retailer’s larger store network provides scale to grow share of wallet amid a reset of its Everyday Low Price strategy, focused on better value for shoppers. Supply chain investments will boost efficiencies and earnings over the long term. It’s worth noting there will be incremental costs of $90m-$100m in FY25 related to distribution centre developments at Moorebank and Auburn.   

Before becoming CEO, Bardwell led WooliesX, the company’s e-commerce and loyalty business. These are two areas where she can leave her mark. Digital investments are paying off: there are more average weekly visitors to Woolworths digital platforms than there are to its physical stores. The company’s loyalty program is another growth lever. Everyday Rewards has over 10m active members, with a growing number accessing personalised ‘boost’ offers. Its Cartology media business is also performing strongly, as it uses different formats to promote supplier’s products and its own. Cartology’s revenue has increased at a 34% average rate over the past four years. 

Fresh start

Woolworths needs a strong Christmas to wrap a tumultuous year and provide a strong footing for 2025. Bardwell has the store network, loyalty program and digital expertise to drive earnings growth. Winning back customer trust will be key.   

This is not financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.