As counterintuitive as it may appear, past consumer-facing regulatory enquiries into banks, Qantas and childcare have been relatively cathartic for the stocks that have had to reinvent themselves in the face of some damning findings.
Having studied the share price performance of these stocks following regulatory enquiries, Macquarie recently reminded clients that markets tend to "sell the rumour" and "buy the fact".
The broker’s analysis suggests that 100 days before the final reports were released, these groups on average delivered a 1% fall in return.
However, upon completion or release of the final report, performance turnarounds significantly.
On average, these groups generated a 17% return following the release of the report.
No news is bad news
While no one knows exactly what’s within the ACCC’s soon-to-be-released report into the supermarket sector, it’s expected to include new rules and recommendations around supplier relationships and pricing transparency.
Meanwhile, Macquarie factors in upside for the sector’s two biggest players. The broker also flags an opportunity for a re-rating.
After reviewing its investment thesis for supermarkets ahead of the ACCC’s report into the sector, Macquarie has upgraded Woolworths to outperform with an unchanged target price of $30.80.
Macquarie’s projected kicker for supermarket stocks, following the release of the competition regulator’s year-long report, saw Woolworths' share price jump around 1.4% yesterday from $27.75 to $28.14.
Coles shares were down 0.2% at $18.56.
Macquarie believes Woolworths is currently trading close to a five-year low relative valuation, due to negative sentiment, as a result of negative press coverage and an ACCC focus.
Meanwhile, Macquarie left its outperform rating on Coles unchanged, with margins continuing to benefit from supply chain investments.
However, it expects the 2026 financial year to be a “particularly strong year” for Coles.
Cost cutting and restructuring
Jarden says Woolworths’ ineffective leverage of its supply chain and advanced data capabilities explain its disappointing 1H FY25 earnings, down 4% year-on-year, with Underlying Profit down 21%.
However, brokers appear relieved by management's decision to pursue $400 million in cost savings, with staff levels being the obvious place to start.
For example, while Woolworths booked 1.6x greater sales and earnings in FY24 than Coles, it has twice Coles' headcount above store level.
Cost savings aside, Goldman Sachs expects a refocus on executing the basics and productivity to help bootstrap ailing consumer sentiment post the ACCC inquiry.
UBS expects Woolworths’ portfolio review to focus on the low Return on Funds Employed (ROFE divisions) of Big W and NZ Food.
The broker also expects a more critical view of the profit and ROFE potential of currently loss-making new businesses such as MarketPlus and Healthylife.
While it’s unclear whether a divestment of NZ Food would be on the cards, Citi expects investor support for a demerger.
