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Woolworths (ASX: WOW), a stalwart in the Australian consumer staples sector, has experienced an unexpected and drastic stock selloff of up to 15.8% ($28.14) following a disappointing FY25 earnings report and uninspiring guidance for FY26. The downturn comes on the heels of robust results from competitor Coles (ASX: COL), heightening the contrast in performance.
FY25 Results Overview
Woolworths’ FY25 results largely aligned with market forecasts; however, some figures fell short of expectations, particularly regarding dividends. Below are the key metrics:
- Revenue: Increased by 3.6% to $69.08 billion, slightly below the estimated $69.31 billion (0.3% shortfall).
- EBIT (excluding items): Declined by 12.6% to $2.75 billion, compared to an estimate of $2.78 billion (1.1% miss).
- Normalised NPAT: Dropped by 17.1% to $1.39 billion, marginally beating the $1.38 billion estimate (0.7% positive surprise).
- Dividends: The final dividend decreased by 21% to 45 cents per share, with a total dividend reduction of 41% to 84 cents, falling short of UBS expectations of 86 cents (2.3% miss).
Beneath the surface, troubling trends emerged, particularly in the Australian Food segment, which is crucial for Woolworths’ earnings. EBIT from this segment fell 12.6% to $2.75 billion and was 1.2% below consensus estimates. Additionally, the return on funds employed (RoFE) for Australian Food dipped by 4.8% year-on-year, prompting concerns from analysts like Michael Toner of RBC Capital Markets.
Disappointing FY26 Guidance
The guidance for FY26 proved even more disheartening, especially the early trading update indicating only 2.1% sales growth in the first eight weeks. This was below the consensus expectation of 2.9%, leading to increased scrutiny from investors. Adding to the stakes, Woolworths saw a 2.4% rise in stock value the day before its results, driven by Coles’ strong FY25 performance, which may have inflated expectations.
In contrast, Coles reported strong results, which included:
- Revenue: Up 3.6% to $44.35 billion, matching estimates.
- Underlying EBIT: Increased by 7.5% to $2.22 billion, surpassing expectations by 5.7%.
- Underlying NPAT: Rose to $1.18 billion, exceeding the $1.11 billion estimate by 6.3%.
- Dividends: Totaled 69 cents per share, exceeding Goldman Sachs’ estimate of 64 cents (7.8% beat).
Coles also announced a 4.9% growth in supermarket sales for the first eight weeks of FY26, significantly outperforming Woolworths’ modest 2.1%.
Challenges with Tobacco Sales
Woolworths faces considerable headwinds from declining tobacco sales, an area where Coles has managed effectively. Coles reported adapting to a 30% drop in tobacco sales, bringing this segment down to under 3% of total sales, compared to Woolworths, which identified tobacco declines as a substantial challenge. CEO Amanda Bardwell highlighted that a sharp drop in tobacco sales could impact EBIT by $80 to $100 million.
Concerns Regarding Future Guidance
Bardwell’s guidance conveyed limited optimism, with expectations for "mid to high single-digit" EBIT growth in FY26. This translates to a projected EBIT of around $2.95 billion, which is below market expectations of $3.11 billion, representing a potential 5.1% miss.
Conclusion
The recent results from Woolworths unveil a company struggling to keep pace with its primary rival, Coles, as its stock suffers from not only disappointing figures but also strategic misalignments. Coles has adeptly navigated challenges such as falling tobacco sales, achieving better margins in the process. In contrast, Woolworths has faced setbacks, including industrial actions that occurred in late 2024 and the costly closure of MyDeal.com, which it had acquired for $270 million just two years prior.
Given the current performance trajectory, shares of Woolworths have plummeted by approximately 20% over the last year, while Coles has surged nearly 25%. This performance gulf has positioned Woolworths’ stock at historical lows compared to Coles, potentially offering a value opportunity. However, while relative valuations may appear enticing, the operational realities clearly favour Coles in terms of earnings performance, margins, and effective strategies.
