The August Earnings Miss That Broke Confidence
Woolworths' FY25 full-year results, released in August 2025, shattered the narrative that Australia's grocery sector was immune to economic pressures. The company reported net profit after tax of $1.72 billion, down 3.2% year-over-year, missing analyst consensus expectations by approximately 4-5%. More concerning than the absolute decline was the composition of the miss: Australian Food—the core supermarket business generating 70%+ of group earnings—saw EBITDA margins compress by 30-40 basis points despite sales growth.
This margin compression occurred in an environment where grocers theoretically should be expanding margins. Inflation has moderated from 2023-2024 peaks, reducing political heat around grocery pricing. Consumer confidence, while weak, has stabilized rather than continuing to deteriorate. Yet Woolworths couldn't translate this favorable backdrop into bottom-line growth.
Management attributed the margin pressure to several factors: increased investment in price competitiveness to defend market share against Coles and Aldi, elevated labor costs as the tight employment market drove wage inflation, supply chain inefficiencies requiring additional investment, and promotional intensity increasing as competitors fought for volume.
Each explanation is individually credible but collectively concerning. They suggest Woolworths is operating from weakness rather than strength—forced to match competitor pricing rather than leading on value, unable to offset wage inflation through productivity improvements, and losing pricing power as market share erodes.
The market's response was swift and brutal. Woolworths shares fell approximately 13% in the two trading days following results, with further declines accumulating through September and October as analysts downgraded earnings forecasts.
The Coles Performance Contrast
Coles reported FY25 results showing net profit growth of 4.3%, beating expectations modestly and demonstrating margin expansion in its core supermarkets division. The company achieved this despite operating in identical market conditions as Woolworths.
Coles has invested heavily in automated distribution centers over the past 3-4 years, creating supply chain efficiency advantages that are now flowing through to margin expansion. While Woolworths also operates automated facilities, Coles' network is newer and more extensive, reducing labor costs per unit and improving stock availability.
The companies have also taken different approaches to private label strategy. Coles aggressively expanded private label penetration to 35%+ of sales, capturing higher margins while offering value to cost-conscious consumers. Woolworths maintained lower private label penetration around 25-28%, preserving shelf space for branded suppliers but sacrificing the margin opportunity.
Consumer perception surveys consistently show Coles making gains in value perception while Woolworths has slipped. The ACCC's supermarket pricing inquiry found that both chains engaged in misleading discount practices, but media coverage disproportionately focused on Woolworths examples, damaging brand perception more severely.
The Big W Albatross
Big W reported FY25 EBIT of just $32 million on sales of $2.8 billion—representing a margin of barely 1% that fails to cover the chain's capital requirements. Department store retailing in Australia has faced structural decline for over a decade as online competition and changing consumer preferences erode the traditional model.
Woolworths has attempted multiple Big W turnaround strategies over the past 15 years, cycling through management teams, store format changes, and product category shifts. Each initiative showed brief improvement before deteriorating back to marginal profitability or losses. The pattern suggests the problem isn't execution but rather a fundamentally challenged retail format in permanent decline.
Yet Woolworths remains reluctant to exit Big W through sale or closure. For investors, Big W represents a hidden tax on Woolworths' valuation. Exiting Big W—whether through sale, closure, or spin-off—would clarify Woolworths' core supermarket earnings power and potentially unlock value, but management has shown no appetite for such decisive action.
The Dividend Sustainability Question
Woolworths cut the FY25 dividend 17% to $0.93 per share, down from $1.12 in FY24. This reduction reflected management's assessment that earnings didn't support the previous payout level while maintaining balance sheet strength. The dividend cut was appropriate but shattered the perception of Woolworths as a reliable income stock.
At current share prices near $31-32, the $0.93 annual dividend provides a yield of 3.23% fully franked—grossed up to approximately 4.6% for investors who can utilize full franking credit value. This yield is uncompetitive compared to alternatives: major banks offer 5-6% fully franked yields, miners like BHP and Rio Tinto provide 6-7%+.
The dividend coverage ratio sits around 1.4-1.5x, theoretically adequate. However, this coverage includes Big W's minimal earnings and doesn't adjust for the capital intensity required to maintain competitiveness in supermarkets. If Woolworths' earnings decline another 5-10% through FY26, dividend coverage would compress to potentially unsustainable levels, forcing another cut.
Valuation: Cheap or Fairly Priced?
The 33x P/E multiple appears absurdly expensive for a business with declining earnings and compressed margins. Yet understanding why Woolworths trades at such multiples despite poor recent performance is essential.
Grocery retailing is inherently non-cyclical with predictable cash flows, making supermarket stocks natural defensive holdings. Investors typically accept premium valuations for businesses that provide earnings stability through recessions. Woolworths has historically traded at P/E multiples of 20-25x during normal market conditions.
Breaking Woolworths into components provides perspective: Australian Food supermarkets worth $22-25 billion, PFD Foodservice worth $2.5-3.0 billion, Big W worth $0.3-0.5 billion, and NZ operations worth $1.5-2.0 billion. Summing components suggests enterprise value of $26.5-30.5 billion. Current market capitalization around $33 billion sits above this sum-of-the-parts analysis, suggesting 15-25% overvaluation.
The Bull and Bear Cases
The bull case: Woolworths maintains approximately 37% share of Australian grocery sales—the largest in the market. This scale provides purchasing power advantages and logistics efficiency that smaller competitors cannot match. A single year of relative underperformance doesn't eliminate decades of accumulated advantages. Management change, operational refocus, and capital reallocation could restore performance parity with Coles within 12-24 months.
The bear case: Woolworths' market share has declined gradually for several years. If this erosion accelerates, the company's scale advantages erode and margins face permanent compression. Coles' supply chain investments have created cost advantages that won't evaporate, meaning Woolworths faces years of catch-up investment just to reach parity.
What Investors Should Know
Valuation multiples mislead—the 33x P/E results from depressed earnings potentially 10-15% below normalized levels. If earnings recover to $1.80-2.00 per share over 2-3 years, the forward multiple compresses to more reasonable 15-18x.
The Coles performance gap is fixable but requires execution. Woolworths' challenges stem from operational issues rather than insurmountable structural headwinds. Supply chain investments, market share defense, and Big W resolution could close the performance gap within 18-24 months.
Dividend sustainability is the critical factor for traditional holders. Further dividend cuts would eliminate Woolworths' appeal to income investors. Risk-reward appears balanced but requires patience—at current prices, Woolworths offers reasonable potential for investors with 2-3 year horizons willing to endure volatility.
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