The February 2025 earnings season has placed Coles (ASX: COL) and Woolworths (ASX: WOW) under the microscope, with both supermarket giants facing an evolving retail landscape. While Coles demonstrated strong execution and market share gains, Woolworths encountered cost pressures and operational disruptions that impacted profitability. However, despite their contrasting short-term results, both companies present compelling investment opportunities, each offering distinct risks and rewards for investors.

Coles: Strong Execution and Market Gains

Coles (ASX: COL) delivered a net profit after tax of A$576 million, maintaining stability in an economic environment where cost-of-living pressures have influenced consumer spending habits. The company’s supermarkets division achieved a 4.3% revenue increase, reflecting its ability to retain customers through value-driven promotions, digital transformation, and supply chain resilience. The decision to declare a 37 cents per share dividend, the highest in over five years, reinforces its commitment to shareholder returns.

Leveraging Supply Chain Strength and Market Share Gains

Coles successfully capitalised on Woolworths’ supply chain disruptions, which were impacted by industrial action, capturing an estimated $120 million in incremental sales. This underscores Coles’ ability to execute efficiently under pressure, reinforcing its reliability to Australian consumers. By strengthening its distribution networks and investing in automation, Coles has positioned itself as a more dependable option for both suppliers and customers during periods of market instability.

Digital Expansion Driving Future Growth

One of the key drivers of Coles’ ongoing growth has been its investment in digital retailing. The company reported a 22.6% rise in eCommerce sales, with a 55% increase in Coles App monthly active users. Innovations such as windowless Rapid Delivery and the full transition to automated customer fulfillment centers have streamlined its online order execution. As consumer demand for convenience continues to grow, Coles’ investment in digital and logistics infrastructure ensures it remains competitive in the fast-evolving grocery sector.

Margin Expansion and Cost Management Initiatives

Coles achieved an 88-basis-point increase in underlying gross margins, driven by operational efficiencies and AI-driven inventory management. The company’s ability to optimise stock availability and reduce markdown losses has strengthened profitability. However, cost pressures remain a risk, particularly as wage inflation and supply chain investments continue to weigh on operating expenses. The key challenge for Coles will be balancing its investments in long-term growth while maintaining short-term profitability.

Woolworths: Short-Term Challenges, Long-Term Strengths

Woolworths (ASX: WOW), despite reporting a 21% decline in net profit to $739 million, remains a dominant force in Australian retail with strong foundations for future growth. While the company faced short-term pressures from rising operational costs and supply chain disruptions, its leadership in digital innovation, eCommerce expansion, and customer engagement position it well for a rebound. Grocery sales grew by 2.7%, and its continued investment in convenience, loyalty programs, and supply chain improvements signal a commitment to long-term profitability. The company’s ability to navigate industry headwinds while maintaining its dominant market position highlights the resilience of its business model. With a $400 million cost-cutting initiative underway and ongoing enhancements to its supply chain efficiency, Woolworths is well-positioned to regain profitability as market conditions stabilise.

eCommerce and Digital Innovation as a Competitive Advantage

Woolworths continues to lead the industry in online sales, with eCommerce revenue reaching $4.7 billion, an 18.3% increase year-over-year. Its integration of MILKRUN and expanded on-demand delivery capabilities have positioned Woolworths at the forefront of digital grocery retailing. With 31% of online orders now being delivered within two hours, Woolworths is setting the industry standard for convenience, an area where Coles is still catching up. However, digital expansion comes at a cost, and Woolworths must ensure its online operations contribute positively to overall profitability.

Supply Chain Disruptions and Cost Challenges

One of the biggest setbacks for Woolworths this earnings season was the impact of industrial action, which resulted in $240 million in lost revenue and a $95 million EBIT hit. While these disruptions are temporary, they have exposed vulnerabilities in Woolworths’ supply chain resilience. Rising costs, including higher wages, increased logistics expenses, and elevated stock losses, have further pressured margins. In response, Woolworths has initiated a $400 million cost-cutting program aimed at streamlining operations and improving efficiency, though the full benefits may take time to materialise.

Changing Consumer Behavior and Competitive Pressures

Woolworths is also contending with a shift in consumer behavior. With household budgets tightening, more customers are cross-shopping between multiple supermarkets, leading to increased price sensitivity. This has forced Woolworths to invest heavily in discounting and promotional strategies, which have, in turn, compressed profit margins. While the company has taken steps to improve its value proposition, balancing competitive pricing with sustainable profitability remains a key challenge.

Investment Outlook: Two Different Paths to Growth

While Coles and Woolworths faced contrasting earnings results this season, both companies offer distinct investment opportunities. Coles currently appears stronger in execution, market share gains, and cost discipline, making it an attractive choice for investors seeking short-term stability. Woolworths, despite its earnings decline, retains strong long-term fundamentals, particularly in digital retailing, customer loyalty, and long-term growth strategies. If its cost-saving measures and operational improvements take effect, the company could regain profitability momentum.

For investors, the choice between Coles and Woolworths ultimately depends on individual risk tolerance and investment horizons. Coles offers a steadier trajectory with strong near-term execution, while Woolworths presents a potential turnaround opportunity for those willing to wait for operational improvements to take hold. A balanced portfolio approach could include both, capitalising on Coles’ resilience and Woolworths’ long-term upside.

A Quick Look at Other Retailers in the Sector

Beyond Coles and Woolworths, the February 2025 earnings season also provided insight into other key players in the retail sector. Harvey Norman (ASX: HVN) delivered a 39.7% profit increase, benefiting from AI-driven demand in consumer electronics, though its international expansion efforts faced setbacks. Super Retail Group (ASX: SUL), which owns brands such as Supercheap Auto, Rebel, and BCF, reported a 10% decline in profit due to rising operational costs and margin pressures. Wesfarmers (ASX: WES), despite shutting down its struggling online marketplace Catch, maintained stable performance, underscoring its ability to allocate capital effectively across its retail portfolio.

While the grocery sector remains a defensive investment, opportunities exist in discretionary retail, particularly for companies that are successfully leveraging digital transformation and cost efficiencies. At TAMIM, we continue to assess businesses based on their ability to generate sustainable cash flow, maintain competitive advantages, and navigate changing economic conditions. Coles and Woolworths both demonstrate resilience, with Coles currently positioned as the stronger performer in the short term, while Woolworths retains long-term upside potential through its leadership in digital innovation. For investors, the key decision lies in whether they prioritise immediate stability or are willing to back a longer-term recovery story.

The TAMIM Takeaway

Coles has reinforced its position as a stable, well-executed market leader, leveraging supply chain efficiency, digital expansion, and cost discipline to drive consistent growth. Woolworths, despite short-term challenges, remains a dominant force with strong eCommerce leadership and long-term recovery potential. For investors, Coles offers immediate stability, while Woolworths presents an opportunity for future upside. A balanced approach may provide the best exposure to Australia’s resilient supermarket sector. Execution, adaptability, and pricing power will remain the key differentiators for success in the evolving retail landscape.

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Disclaimer: Coles Group Ltd (ASX: COL), Woolworths Group Ltd (ASX: WOW) and Wesfarmers (ASX: WES) are held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.