UBS: Woolworths is closing in on Coles

Photo: Cameron Spencer/ Getty Images.

The Woolworths turnaround plan appears to be working, with suppliers surveyed calling the Christmas battle in favour of the supermarket chain ahead of Wesfarmers-owned rival Coles.

The chain also improved its customer approval scores, promotions, availability and staff morale ratings, narrowing the gap on Coles in a survey conducted by UBS, which led the bank to believe Woolworths could see its sales and margins recover faster than previously forecast.

Meanwhile, price cuts at Coles to check a resurgent Woolworths may lead to lower-than-expected earnings in the second quarter at the Wesfarmers business.

The revival hands back some momentum to the coountry’s largest supermarket chain, which has grappled with falling sales, senior management exits, the failed Masters hardware business and its first annual loss since listing in 1993.

New CEO Brad Banducci, now at the helm for 11 months, is overhauling the company by dropping prices, reducing jobs and slowing the pace of store openings in a turnaround that may take as long as five years.

This chart, from UBS, shows the supplier score for Christmas trading period.

Source:UBS

The challenge for Woolworths will be maintaining momentum as the effects of the price reductions eases, although store refurbishments may offset that a bit, the analysts said.

Still, higher sales could flow into bigger margins, leading to an increase in operational profits, so UBS now sees a rising chance for the supermarket chain to beat market expectations for profits and sales. But UBS has not upgraded its own estimates on Woolworths.

While Coles wasn’t doing anything wrong, its scores slipped largely due to a lack of new strategy and the retailer may need to change its pricing and invest in its stores to maintain its sales lead, UBS said.

With its own checks suggesting the Coles management was becoming “nervous” over liquor and food sales, UBS said a price war to arrest the slowdown may eat into the supermarket’s second half earnings. While Coles still ranked ahead of Woolworths in the survey, its score fell 0.3 points to 6.6 driven, by declines in overall promotional campaign, range and type of buyers.

UBS expects Woolworths food and liquor EBIT margins to decline through to 2018 due to the turnaround plan before recovering, while Coles is projected to be flat.

UBS has a sell rating and $19.10 price target on Woolworths and a neutral rating and a $42.10 target on shares in Coles parent Wesfarmers. A little while ago, Woolworths was 0.3% up at $24.66 and Wesfarmers 0.5% higher at $41.20.

The survey was conducted between January 9 and 17 and focused on responses from suppliers to Coles and Woolworths.

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