Woolworths Group (WOW) - Closing the gap

Woolworths operates the eponymous supermarket chain in Australia and New Zealand, along with the Big W discount department store network and several e-commerce and specialty retail businesses.‍

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Woolworths (WOW) posted first-half FY26 earnings and an interim dividend ahead of Ord Minnett and market expectations and lifted guidance for full-year earnings growth from its dominant Australian food business to the top end of the "mid-to-high single digit" target range provided at its FY25 results, sending its share up 13%, its largest one-day gain in more than three decades. The nation's largest supermarket chain flagged a strong start to the second half of FY26, with food like-for-like (LFL) sales up 5.8% year-on-year (YoY), or 7.2% excluding tobacco, in the first seven weeks of the period. It is worth noting that tobacco sales now account for only 1.6% of sales, down from 3.1% a year ago, and that proportion will shrink further in the next couple of years, thus removing that particular drag on sales growth.    

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In its other businesses, sales in the Big W discount department store division so far in the second half were flat on a year ago, albeit sales and profitability are typically heavily skewed to the first half in this business, while Woolworth's New Zealand LFL supermarket sales rose only 1.7% YoY in the second half to date, as management highlighted ongoing headwinds from a competitive trading environment and a weak macroeconomic backdrop. That cautious assessment for Big W and the New Zealand business, and the Petstock division, belies a strong first half where all three delivered earnings ahead of forecasts. There is now a growing chance the years of underperformance from these businesses may be coming to an end, although there is still plenty of work still to be done.

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Group cost control over the period impressed – growth in operating expenses was just 2% in the half, down from the mid-to-high single-digit rates seen in recent years. Post the result, we have raised our EPS estimates by 6.3%, 5.1% and 6.1% for FY26, FY27 and FY28, respectively, to incorporate actuals and our view that Woolworths will maintain its market share versus arch-rival Coles (COL), which has made the running for several years now. This outlook leads us to raise our target price on Woolworths to $39.00 from $33.00, although valuation means we trim our recommendation to Accumulate from Buy.