Written by Sid Ruttala

Few companies are more deeply embedded in the Australian economy than Woolworths. It sits at the heart of everyday spending, riding the same tailwinds and headwinds that shape the national mood. When households tighten their belts, Woolworths feels it in the aisles. When economic optimism rises, it benefits quickly. After a challenging FY25, the supermarket giant has now released its Q1 FY26 sales results, and the story is one of quiet stabilisation. Not a roaring comeback, not a structural reinvention, but a methodical retail turnaround built on price, simplicity and execution.

That might not sound thrilling, but for long-term investors, this is exactly the kind of story that creates enduring value.

A Reset Year

Let us rewind to FY25. Woolworths reported group sales of $69.1 billion, a modest 1.7 percent increase. Group EBIT before significant items fell almost 15 percent, and net profit before significant items dropped 19 percent year on year. The drivers were clear. Wage inflation, price investment to protect market share, margin pressure in Australian Food and underperformance at BIG W all weighed on the bottom line. The company spent the year defending its position and setting the stage for a reset.

At the time, management outlined three strategic priorities. First, get it right for customers. That meant sharper value, more consistent availability and stronger convenience propositions. Second, simplify the way the business works, with a $400 million above-store cost-out target by the end of calendar 2025 and major investments in automated distribution. Third, unlock the full potential of the group through portfolio rationalisation and operational focus. The sale of MyDeal and integration of Healthylife into core operations were part of that plan.

In short, FY25 was less about results and more about building a platform to deliver them later. That kind of year rarely excites investors. But it often sets up the stories that do.

Early Signs of Traction

Q1 FY26 is the first real test of whether Woolworths’ plan is working. The 14-week period to 5 October 2025 showed group sales up 2.7 percent year on year to $18.5 billion. Australian Food, the engine room of the business, was up 2.1 percent overall and 3.8 percent excluding tobacco. Group eCommerce sales grew 13.2 percent, with On Demand orders increasing 39 percent. New Zealand Food continued its turnaround, with sales up 3.2 percent in local currency. Even BIG W, which dragged results in FY25, delivered modest sales growth of 1.0 percent.

Perhaps more telling than the raw numbers were the signals from customers. Woolworths’ Voice of Customer Net Promoter Score rose 3 points on the prior year and 4 points on the previous quarter. Value for Money VOC rose 5 points year on year. Prices excluding tobacco fell for the seventh consecutive quarter. These are not glamorous metrics. But they are the sort that tend to precede sustained volume improvements and, in time, margin recovery.

Average weekly traffic on Woolworths’ digital platforms grew to 29.3 million. More than 750 products now sit in the Lower Shelf Price program, which is growing units at double-digit rates. The company is delivering on its promise to make Woolworths feel more affordable again, not by flashy promotions but through persistent price resetting and strategic offers through Everyday Rewards.

This is the foundation of a retail turnaround. It does not happen overnight. It builds quarter after quarter.

Australian Food: Stabilising the Core

Australian Food is the beating heart of the Woolworths investment case. It generated $51.5 billion in sales in FY25 and remains the group’s primary earnings driver. FY25 saw margins squeezed as Woolworths fought to maintain price competitiveness while managing labour cost pressures. Q1 FY26 hints at the early stages of stabilisation.

Excluding tobacco, sales grew 3.8 percent, a notable improvement on FY25 trends. Comparable sales grew 1.6 percent, supported by increased items per basket and improving availability. Fresh food categories led the way, particularly Chilled, Meat and Fruit, while Long Life categories remained soft but stable. Tobacco remains a significant drag, declining over 50 percent year on year.

Importantly, price deflation is no longer creating panic. Fruit and vegetables moved into deflation due to higher supply of berries and avocados. Long Life categories saw modest deflation. For investors, this matters because it reflects an environment in which Woolworths is controlling the deflation rather than being whipsawed by it. It is using lower prices as a deliberate competitive lever, supported by its scale, distribution advantages and digital engagement.

Ecommerce penetration rose to 16.2 percent. The company’s On Demand delivery and MILKRUN offerings continue to expand rapidly. This is one of the clearest competitive advantages Woolworths holds over traditional retail peers and smaller independents. It is a moat that is expensive to build and difficult to replicate.

New Zealand Food: A Quiet Turnaround

New Zealand Food was one of the brighter spots in FY25, and that momentum has carried into Q1 FY26. Total sales grew 3.2 percent in local currency. VOC NPS improved by six points year on year, with meaningful gains in both store controllable metrics and online experience. Ecommerce penetration rose to 16.8 percent.

The rebrand to Woolworths New Zealand is progressing ahead of schedule. Everyday Rewards membership in New Zealand increased by around 250,000 members over the past year, with engagement improving significantly. This is a market that was once a drag on group results but is now beginning to pull its weight.

For long-term investors, the significance is subtle but important. A stabilised and growing New Zealand operation provides earnings diversification and reduces the reliance on the core Australian supermarket business to carry the entire group.

BIG W: From Problem Child to Possible Contributor

In FY25, BIG W posted an EBIT loss of $63 million. The business was squeezed by clearance activity, soft discretionary spending and operational complexity. In Q1 FY26, BIG W sales grew 1.0 percent, and gross transaction value rose 5.7 percent, supported by stronger performance in Clothing and Toys. Ecommerce penetration grew from 12.5 to 17.3 percent. BIG W Market, which is now integrated into the broader platform strategy, saw sales surge 148 percent.

This is not a turnaround story completed. It is a turnaround story beginning. Management is transitioning BIG W to an independent technology platform in FY26, aiming to drive better efficiency and flexibility. If the business can sustain mid-single digit GTV growth and gradually expand margin through mix and efficiency, it can shift from being a drag on group earnings to a contributor.

In a market where investors are fixated on Woolworths’ core supermarkets, this is an underappreciated lever.

B2B: The Quiet Performer

While less visible, the Australian B2B segment continues to perform solidly. Q1 FY26 sales increased 6.2 percent, driven by PFD Food Services and Export Meat. Export Meat sales surged over 30 percent due to strong international beef markets. B2B Supply Chain revenue excluding tobacco grew modestly, supported by the expansion of Primary Connect’s customer base.

This segment provides incremental earnings resilience and diversification. It is not a growth rocket, but in retail, stability has value.

Why This Matters for Investors

The Q1 results are not fireworks. They are not meant to be. Woolworths is not trying to reinvent itself as a high-growth retailer. Instead, it is aiming to execute better. After several years of cost pressure and consumer strain, that might be the smarter strategy.

There are three key investment implications.

First, stabilising the core. Australian Food remains the profit engine. As price investments mature and inflation stabilises, Woolworths can capture more operating leverage from its fixed cost base. Volume recovery tends to lag customer sentiment improvements, and early signs suggest that lag is now narrowing.

Second, digital scale matters. Ecommerce growth of 13.2 percent is not just a sales figure. It reflects a structural advantage built through years of investment. Competitors can offer promotions. They cannot replicate nationwide delivery and pickup infrastructure overnight. This creates a durable moat.

Third, portfolio simplification is starting to work. Closing MyDeal, integrating Healthylife and repositioning BIG W and Petstock are reducing noise and focusing capital where it counts. Investors often underestimate how powerful simplification can be in improving group returns.

The Next Test: Christmas Trading

Q2 is always the critical quarter for Woolworths. It covers the Christmas trading period, when consumers spend more freely and retailers battle for share of wallet. Management has already indicated that Woolworths Food Retail sales in Q2 to date are up 5 percent excluding tobacco. This is encouraging. It suggests that the pricing and value investments are translating into stronger momentum heading into the festive season.

This quarter will not only set the tone for FY26 earnings but also determine whether the market begins to re-rate Woolworths from a defensive stalwart back to a business with modest growth and improving margins.

Valuation and Market Positioning

Woolworths currently trades on a multiple consistent with its reputation as a defensive blue-chip. The market has largely priced in modest growth and stable earnings, not a material reacceleration. If the company delivers on its guidance of mid-to-high single digit EBIT growth in FY26, this expectation may prove too low.

Unlike some of the fast-growing but operationally volatile retail names, Woolworths has a strong balance sheet, deep operational infrastructure and structural digital advantages. This creates a classic setup. If management executes, there is scope for both earnings growth and multiple expansion over time. If not, the business still offers stable cash flows and a sustainable dividend.

For investors seeking optionality without excessive risk, this is an attractive mix.

The TAMIM Takeaway

Woolworths is not trying to be flashy, it is quietly rebuilding. The company is focusing on price and value perception to reconnect with its customers, using its digital scale to strengthen its competitive position and simplify its portfolio to sharpen execution. These steps are beginning to show tangible results in customer sentiment, sales momentum and operational clarity. The Q1 FY26 update is an early proof point that Woolworths is on the right path, but the more telling moment will come through the key Christmas trading period in Q2. If the current trajectory holds, FY26 could represent a meaningful inflection point, shifting the business from playing defence to delivering disciplined growth. In a high-rate, slower-growth environment, this kind of measured, fundamentals-driven turnaround is exactly the type of story that markets tend to reward.

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Disclaimer: Woolworths Group Ltd (ASX: WOW) is held in TAMIM’s Equity Income IMA’s as at date of article publication. Holdings can change substantially at any given time.