Woolworths jumps 12% in biggest rally on record. Is the Coles gap closing?

Woolworths (ASX: WOW) is back on track with EBIT expanding across every division and meaningful progress toward its $400 million run-rate cost savings target.

That’s the view of Elston’s Joe McCarthy after Woolworths delivered its latest result, and the market appears to agree.

The stock has surged almost 12% today, putting it on track for their largest one-day gain on record since it was listed in 1993, after first-half numbers comfortably beat expectations and full-year guidance was nudged higher. 

Coles has been a clear outperformer over the past year, with Woolworths losing market share amid operational missteps. The strong result raises the prospect of a genuine turning point for the company. 

McCarthy, Portfolio Manager at Elston, unpacks the result, explains why he rates the stock a Buy, outlines what could unlock further upside, and highlights the key risks investors should keep front of mind.

Key Numbers

• Revenue up 3.4% to $37.14bn vs. $37.21bn ests (in-line)
• EBIT up 14.4% to $1.66bn vs. $1.56bn ests (6% beat)
• NPAT ex-items up 16.4% to $859m vs. $798.3m ests (8% beat)
• Interim dividend up 15.4% to 45 cps vs. 43 cps ests (4.6% beat)
• FY26 EBIT growth now expected at the upper end of the mid-to-high single-digit range, with Australian Food H2 sales tracking up 5.8% (7.2% ex-tobacco) in the first seven weeks
• BIG W is on track to be EBIT and cash flow positive in FY26 though heavily weighted to H1, with early H2 sales flat on the prior year

Do you currently hold Woolworths and what is your rating?

Rating: BUY

Yes, we currently hold Woolworths in the portfolio.

After meeting with the company late last year, it became clear that management was honest about their internal shortcomings and had a robust plan to rectify them. There was a significant disconnect between the market's view and our assessment of management's accountability for and grasp of the issues at hand. 

The 1Q26 trading update confirmed that turnaround initiatives are already driving improved sales performance.​

The result further reinforces this view. From this result, we can see they are back on track with EBIT growth across all divisions and progress on delivery of $400m run rate cost savings.

What matters from the results?

For Woolworths, the focus remains squarely on the Australian Supermarkets division. 

The two metrics that matter most are:

Top-line sales performance

In recent years, Woolworths lost market share to Coles due to weaker operational execution. 

However, the 1H26 result was strong and ahead of expectations, displaying a positive trajectory that indicates management’s turnaround initiatives are taking hold.​

Maintenance of Australian Supermarkets margins

A key investor concern has been potential margin compression, similar to the mid-2010s strategic refresh when insufficient price reinvestment led to unsustainable earnings. 

Encouragingly, 1H26 margins were slightly ahead (excluding tobacco) despite a flagged $100 million price investment. 

Low price growth suggests these reinvestments were achieved in partnership with suppliers, aided by ongoing supplier consolidation efforts (e.g., reducing suppliers from a single produce line from ten to two), both of which should drive sharper pricing.​

How do those outcomes affect the outlook?

Over the medium term, we expect solid, predictable growth for Woolworths.

• Industry growth and stabilised market share should deliver a fairly predictable positive revenue trajectory. While there is potential for operating leverage, we expect this will be reinvested into price, leading to stable margins and earnings that grow in line with revenues.
• We anticipate some margin expansion in FY26 as the company cycles the disruptions from mid-FY25 industrial action.​

Operational milestones:

• Simplification of the business and clarity on the outlook for Big W (hopefully a divestment) are key
• What was interesting is the launch of Olive, their new AI Shopping assistant. Whilst it likely offer a broad range of benefits on first glace it may improve online penetration as should make it quicker and easier to assemble your basket

Valuation outcomes:

• Multiple expansion as the discount priced in last year for the deterioration in operating performance seen unwinds

What should investors be paying attention to as the story unfolds?

Biggest upside driver:

• BIG W Divestment: Woolworths is structurally and financially separating BIG W. A formal divestment would simplify the business and unlock value.​

Biggest risk:

• Labour Costs: Stronger-than-anticipated labour cost inflation puts pressure on EBA negotiations. While the current agreement expires in April 2028, market focus will shift to renegotiation risks over the next two years, potentially impacting earnings expectations and valuations.​

What could you be wrong about?

Our primary blind spot is underestimating competition from adjacent retailers. 

Players like Amazon and Bunnings are aggressively targeting these categories, which appear to be high-margin. We believe that since the entry of Aldi into the market, this has always been a frictional headwind – in our view, it is not necessarily coming from Woolworths and Coles, and does not appear to be impacting their sales performance (for now, remains a watching brief). 

It would be remiss of us not to mention that AI may lead to achieving greater efficiency and exacerbate this issue / enable competitors.

Additionally, the ACCC trial on discounting presents an industry-wide risk. Although Coles is currently in the hot seat—which may perversely reverse some of the brand damage Woolworths suffered during the Senate inquiry - a strict redefinition of what constitutes a "discount" could fundamentally alter grocery pricing strategies.

Ironically, thinking about the money that is going into the courtroom defining what a discount is from both the supermarkets and the ACCC, I would prefer to see that go back into lower prices at the checkout (Ultimately it is coming from somewhere – it’s a zero-sum game).