Coles (ASX:COL) Drops 8% Despite Strong Supermarket Earnings: Buy Signal or Warning Sign?

Coles shares fall despite strong supermarket earnings

Coles Group (ASX: COL) dropped more than 8% on Friday to around A$20.34, even after delivering double-digit profit growth in its supermarket business. Group EBIT rose 10.2% to A$1.23 billion, supermarkets’ EBIT surged 14.6%, and underlying net profit climbed 12.5% to A$676 million. So why is the market punishing a stock that just posted some of its best numbers in years? The answer lies in timing, expectations, and a few problems the headline numbers can’t hide.

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Coles’ Supermarket Engine Is Firing, But the Market Wanted More

The core grocery business is in great shape. Supermarket sales grew 3.6% to A$21.4 billion, with EBIT margins expanding 55 basis points to 5.8%, helped by lower tobacco drag, automated distribution benefits, and A$133 million in cost savings. Online grocery sales jumped 27%, now making up 13.1% of total supermarket revenue.

But here is the problem. Earlier this week, Woolworths (ASX: WOW) delivered a 16% profit beat that sent its shares up 11% in a single day. That result reset the bar sky-high for Coles. Analysts at Morgans were expecting an underlying NPAT of A$699 million, but Coles came in at A$676 million, falling short. On top of that, a A$235 million provision tied to Fair Work Ombudsman proceedings over underpaid staff dragged statutory profit down 11.3%. And the liquor division was a clear weak spot, with revenue falling 3.2% and EBIT collapsing 37.3%.

The forward-looking data made the comparison even sharper. Coles reported supermarket sales growth of 3.7% for the first seven weeks of Q3, while Woolworths posted 5.8% over the same period. Even though Woolworths’ figure is partly flattered by cycling last year’s industrial action, the gap suggests Coles may be losing market share, and that’s the kind of signal institutional investors don’t ignore.

In our view, the supermarket business is genuinely strong, but Coles needed a Woolworths-level surprise and simply didn’t deliver one.

The ACCC Overhang and Woolworths Shadow: What’s Really Weighing on the Stock

Beyond the earnings miss, the ongoing ACCC Federal Court case is creating real uncertainty. The case, which kicked off in February, alleges Coles temporarily hiked prices on at least 245 products before placing them on “Down Down” promotions at levels that were the same or higher than before. The ACCC’s barrister called it “utterly misleading”. Coles argues the increases reflected genuine cost pressures during the inflation surge. A judgment is expected by mid-2026, and penalties could be significant.

Then there is the Woolworths factor. After Woolworths’ blowout result, investors are questioning whether Coles is losing ground to its bigger rival. This matters because supermarket stocks trade heavily on relative momentum between the two giants. We believe this “number two” narrative is overdone. Coles’ underlying supermarket margins are strong, and the market seems to be over-penalising what was still a solid result.

The Investor’s Takeaway

At the recent price of A$20.34, Coles trades on a forward P/E of roughly 23 times with a dividend yield of around 3.2%. The interim dividend rose 10.8% to A$0.41 per share, fully franked, which signals management confidence in the outlook.

For patient income investors, this selloff on a solid underlying result looks like an opportunity. The core business is healthy and growing. However, this is not a clean buy. The ACCC case and liquor weakness mean there are real risks to work through. We believe investors comfortable with near-term uncertainty may find the recent price attractive, while those wanting a clearer picture should wait for the ACCC outcome expected in mid-2026.