Woolworths: Everyday Essentials Offering Yield Between 5.98%-6.38% (AUD)

Background

Woolworths, with its first store dated back to 5 December 1924, has grow to be the largest supermarket chains in Australia. The group employs over 202,846 members and operates a total network of 1,715 stores across Australia and New Zealand (Australia: 1,531, New Zealand: 184). In fact, they are the largest employer in Australia, employer even more than Wesfarmers, Coles Group, Ramsay Health Care, Commonwealth Bank and the likes.

Dominated by a few

Australia supermarket industry is virtually dominated by a small number of participants, which makes it a highly concentrated industry.

Notably, Woolworths and Coles account for particularly large proportion of the market, together constituting 67% of total retail sales (Woolworths: 38%, Coles: 29%), followed by ALDI with 9%, while the other 24% is shared among other various players.

Table 1: National supermarket retail share of sales

In terms of revenue composition, Australia Food division typically accounts for the lion share, with 73% of 1H26 revenue comes from the division. Australia B2B makes up another 9%, New Zealand Food with 10% and W Living (discount general merchandise and pet products) with the remaining 8%.

Table 2: Breakdown of Woolworth’s revenue channel

Supermarkets excessive pricing prohibition comes into effect on 1 July 2026

Effective 1 July 2026, the ACCC (Australian Competition and Consumer Commission) enforces prohibition rules on "significantly excessive" pricing against major Australian supermarkets exceeding A$30 billion in annual revenue. The only supermarkets that currently meet the revenue threshold are Woolworths and Coles.

Rather than imposing rigid price caps, the regulator gains expanded powers to audit costs and impose penalties for unjustifiable margins. We believe long-term earnings impact should remain manageable, as net profit margins of 2%–3% leave little room for price-gouging claims, and legitimate cost pass-throughs (e.g., labour, freight, input costs) remain permitted.

Scale and supply chain efficiencies will preserve balance sheet strength, shifting future earnings growth drivers toward volume expansion and cost optimisation.

Profit trend has swayed due to provision/one-off item, expect a recovery in the future

In terms of profitability, Woolworths has depend on its market dominancy to consistently delivered gross profit margin in the 27% range. Net profit margin has seen some hovering, due to different one-off provisions and non-cash items.

In FY24, Woolworths recorded a goodwill impairment of AUD 1.5 billion related to its New Zealand Food business, due to a challenging operating environment. The non-cash write-down drove its net profit margin down to just 0.17% for the year. In FY25, the group had to record a total of AUD569 million in impairments, due to poor performance in BIG W clothing segment, as well as closure of MyDeal and Healthylife.

As for 1H26, the group has to record a AUD710 million in provision for payroll remediation. This is related to a Federal Court decision concerning historical underpayments of store team leaders over several years.

Notwithstanding these temporary drag factors, we believe management to have internalised these historical missteps and pave a way for a recovery in underlying net profitability.

Table 3: profit trend

For retail properties and distribution centres, Woolworths enter into longer term leases so that its lease payments are much more predictable. There’s typically also extension options baked into the leases, renders a much more stable leases duration.

Table 4: Woolworth’s property leases 

Scale up in online shopping

Woolworths’ push in digital and e-commerce has been bearing fruit as customers continue to seek for greater convenience. Group e-commerce revenue reached AUD 5.3 billion in 1H26 (+14.8% YoY), underpinned by solid performance across all operating units.

Australian Food spearheaded the growth, expanding 15.3% YoY to AUD 4.3 billion (1H25: AUD 3.7 billion) behind expanded same-day delivery, Direct-to-Boot fulfillment, and proprietary app search tools. New Zealand Food posted matching momentum, rising 13.9% YoY to AUD 705 million (1H25: AUD 619 million).

Meanwhile, discount retailer BIG W saw a marked re-acceleration in digital activity, surging 12.2% YoY to AUD 331 million (1H25: AUD 295 million), a sharp rebound from 4.2% growth in 1H25. This is driven by broader marketplace expansion and increased traffic.

Table 5: Growth in eCommerce sales

Continue to exhibit strong cash conversion cycle

Looking at cash conversion cycle (CCC), the group continue to enjoy negative CCC, a hallmark of strong retail operations (they get paid by customers before they need to pay suppliers). They effectively enjoy interest free credit that reduces reliance on short-term borrowings.

Table 6: Cash conversion cycle

Underlying ratio remains decent barring the provision impact

The group’s interest servicing ability saw temporary compression in 1H26, with the interest coverage ratio declining to 2.26x (1H25: 3.50x). This reduction was primarily driven by a one-off AUD 710 million statutory provision booked for salaried team member payroll remediation following a legal ruling. Stripping out the non-recurring provision, 1H26 adjusted interest coverage remained robust at 3.92x, reflecting core operational resilience.

As for gearing level, the group’s debt to EBIT similarly spiked to 10.14 times due to the accounting for provision. However, from a cash liquidity perspective, 1H26 debt to operating cash flow improved to 3.51 years (1H25: 4.73 years), demonstrating the strong cash generation capability. This allows the group to comfortably service and retire its debt liabilities despite statutory earnings noise.

Table 7: Gearing level and other credit ratios

Risks

One of the key risks is the potential entry of competition, in particular the infiltration of Amazon into Australia. Thus far, risk remains manageable as Amazon currently only focus on Amazon Fresh delivery footprint across metropolitan areas rather than the whole of Australia. Alongside Amazon’s global retreat from physical Amazon Fresh stores, we believe this would make it harder to undermine brick and mortar supermarket chains like Woolworths.

Recommendation

We continue to like Woolworth’s positioning as the largest supermarket chains in Australia, alongside its respectable profit margin and decent credit profile. As such, we expect them to continue be relevant and resilient players in the Australian corporate bond space.

Given the size of their outstanding bonds, we believe Woolworths is well-positioned to meet their debt obligations, as the amounts are smaller than their annual dividend payouts. In the unlikely event that operational cash flows become constrained, the companies could opt to suspend dividends to prioritise debt servicing, although at the cost of shareholders.

Table 8: Dividend distribution trend

Within Woolworths, we like WOWAU 5.910% 29Nov2034 Corp (AUD) in particular, as it offers an attractive yield of 6.38% and aligns with our recommended AUD longer end tenor of 7 to 10 years maturity bucket.

Table 9: Recommended bond list