Macquarie Says Coles’s Price Reinvestment Is Strategically Sound

what happened

Analysts at Macquarie view Coles’s decision to put money back into prices as sensible, even though the market has trimmed earnings forecasts after a weak first-quarter sales update. Coles reported same-store sales growth of 2.7% in the first quarter, less than half the pace posted by Woolworths. Households are squeezed, and Macquarie believes Coles has lost market share to its rival.

Margins are under pressure from both price investment and fuel costs. Coles’s new first-half guidance for supermarket EBIT came in 6% below consensus. Macquarie says the company is moving early to stop the share losses: “We see headwinds as partly temporary, and ultimately driving more favorable outcomes long term.” The broker keeps its outperform rating but lowers its price target by 4% to A$24.00 a share. The stock closed last week at A$21.66.

why it matters

For investors, the key question is how quickly Coles can win back market share and rebuild margins. A weaker profit outlook in the grocery segment also matters for Woolworths, which the report says is taking customers from Coles.

market impact

Coles shares: guidance below expectations weighs on the stock, while Woolworths gains from its rival’s share losses

• ▼Coles shares pressure down — EBIT guidance below consensus and lower earnings expectations

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