By Rishav Chatterjee and Aaditya GovindRao
(Reuters) - Earnings updates from two of Australia's biggest supermarket operators this month will be parsed by investors for any direction on future costs and signs of margin pressures.
Woolworths and Coles, which together command nearly two-thirds of total sales in the Australian supermarket sector, have thrived amid high inflation through much of last year.
They were successful in passing on costs to customers, who met the price rises with residual spending power from the COVID-19 lockdowns when the economy was estimated to have saved A$300 billion ($196.68 billion).
The resultant boom in margins is expected to wane as easing inflation starts to crimp their ability to hold on to prices, analysts said, pointing to a faster-than-average cooling in food inflation even as other costs of running a business such as rents, fuel and power remain at elevated levels.
Consumer price inflation in Australia eased to 0.6% at the end of December over the prior quarter, while food inflation eased for a fourth straight quarter.
Woolworths reports interim earnings on Feb. 21 and Coles on Feb. 27.
Woolworths, which accounts for 40% of total supermarket sales in Australia, saw a jump in sales in the quarter ended September 2023, thanks to easing prices for meat, fruit and vegetables, but warned cost-of-living pressures were making its trading outlook uncertain.
While analysts expect Woolworths to post a rise in interim profit, they are watchful of cost management measures and their effect on margins, which have shown signs of hitting a ceiling.
"The key near-term risk, in our view, is margin," Jarden analysts said in a note. They cited a softening in sales so far this year and higher costs of doing business for potential margin risks.
Jefferies analysts said they expect solid results, but added margins may have peaked with food inflation moderating.
Woolies has also flagged a near $1 billion impairment charge at its New Zealand business, citing macro-economic challenges with compressed earnings-indicative margins reflecting stiff market competition and sticky cost pressures.
Excluding the impairment charge, Woolworths is expected to report an interim profit of around A$941 million ($613.5 million), according to LSEG IBES estimates, compared with A$907 million last year.
Its smaller rival, Coles, is set to report lower earnings as the No. 2 grocer is already grappling with margin contraction due to underlying cost inflation.
"Coles is apparently struggling to contain costs given that its profits have shrunk and that its margins have been contracting despite rising revenues," analysts at MarketGrader said in a note.
UBS expects the retailer to report an interim profit of A$572.8 million, compared with A$643 million a year earlier.
($1 = 1.5337 Australian dollars)