Why has the Woolworths (ASX:WOW) share price underperforming Coles in the last month?

A customer and two employees at a supermarket checkout lane. A mature mixed race woman is the cashier and a senior woman is the shopper.

The Woolworths Group Ltd (ASX: WOW) share price has underperformed the Coles Group Ltd (ASX: COL) share price over the last month.

Woolworths shares have dropped 2.6%, whilst Coles shares have gone up by 1.9%. That means there has been a 4.5% outperformance by Coles over the last month.

What has happened in the last month?

Both businesses have given their FY22 first quarter updates.

Woolworths said that its continuing group sales were up 7.8% year on year to $16 billion, with group e-commerce sales up 53.5% to $1.88 billion.

However, the biggest division – Australian food – only saw growth of 3.9% and comparable growth of 2.7%.

The Australian business to business (B2B) division saw 196.4% sales growth to $952 million. That segment includes PFD Food Services and Woolworths International.

New Zealand food experienced a 12.9% increase in sales in Australian dollar terms to $1.96 billion.

However, Big W experienced a 17.5% decline in the sales to $920 million. Lockdowns impacted the trading here.

The broker UBS recently rated the Woolworths share price as a sell, with a price target of $37. It’s expecting Woolworths shares to drop by more than 5% over the next 12 months.

UBS notes that supermarket sales growth is slowing and profit margins may not be as strong in the future as they are now.

Credit Suisse is much more bearish. It also thinks Woolworths is a sell/’underperform’, but the price target is $31.84.

Woolworths noted in October to date, sales had slowed in its Australian supermarkets as the lockdown restrictions eased, though Big W sales improved as stores reopened.

Coles performance

The Coles sales growth rate was actually lower than Woolworths. Total Coles sales in the first quarter only rose by 1.5% year on year to $9.76 billion. Supermarket sales increased 1.8% to $8.62 billion and liquor sales rose 2.6% to $874 million, though Coles Express sales dropped 10.1% to $262 million. Supermarkets e-commerce sales grew by 48%. The Coles business on track to deliver ‘smarter selling’ benefits of more than $200 million in FY22.

Coles said it was optimistic for the Christmas and holiday period as families and friends get together again.

In the first four weeks of the second quarter, supermarkets comparable sales were “broadly in-line” with the first quarter and approximately 8% up on a two-year basis.

However, Coles Express current fuel volumes are impacting profitability, though volumes are expected to recover in the second half of FY22 as consumer behaviour normalise and mobility increases.

What’s the valuation of the Woolworths share price and Coles share price?

Credit Suisse thinks that Woolworths shares are valued at 33x FY22’s estimated earnings. But it’s ‘neutral’ on Coles, with a price target of $16.93, and thinks that it’s valued at 26x FY22’s estimated earnings.

So, on Credit Suisse’s numbers, Coles is materially cheaper than Woolworths on a price/earnings ratio (p/e ratio) basis.

However, brokers believe that both Coles and Woolworths are going to see inflation cost pressures in the coming months, which could be a negative.

The post Why has the Woolworths (ASX:WOW) share price underperforming Coles in the last month? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COLESGROUP DEF SET. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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