Coles Group Shares Initiated At Neutral, Woolworths Preferred

Coles Group shares (ASX: COL) have gained new coverage on Wall Street, as Goldman Sachs initiates at Neutral, alongside a price target of A$23.00. This suggests a cautious view on the Australian supermarket giant as the firm anticipates competitor Woolworths Group will close its valuation discount.

The initiation comes at a pivotal moment for Australia’s second-largest supermarket chain, which has seen its shares trade at a premium to rival Woolworths in recent months. Goldman Sachs’ A$23.00 price target suggests limited upside from current levels, with the investment bank noting that Woolworths’ relative undervaluation presents a more compelling opportunity for markets seeking exposure to the Australian grocery sector. The Neutral rating places Coles in a holding pattern as analysts assess whether recent operational improvements can justify the company’s current market valuation.

Coles has delivered solid financial performance in its fiscal year 2025 results, reporting sales growth of 3.6% alongside a 6.8% increase in underlying earnings before interest and tax. The company posted underlying net profit after tax growth of 3.7% compared to the previous year, demonstrating resilience in a challenging retail environment marked by cost-of-living pressures affecting Australian consumers. Cash realization reached an impressive 102%, while operating capital expenditure came in slightly below guidance at A$1.27 billion versus the forecasted A$1.30 billion, suggesting disciplined cost management.

The supermarket sector has faced intense scrutiny from regulators and politicians over pricing practices and market power. The Australian Competition and Consumer Commission completed a comprehensive inquiry into supermarket competition, with Goldman Sachs previously assessing that the findings would not materially impact Coles’ existing operations. However, ongoing federal court proceedings regarding discounting practices continue to cast a shadow over the sector, adding an element of regulatory risk that markets must weigh against operational performance.

Analyst sentiment toward Coles has been decidedly mixed in recent months. UBS raised its price target from A$23.50 to A$25.00 in August 2025, maintaining a Buy rating and expressing confidence in the company’s growth trajectory. Morgan Stanley upgraded Coles from Equal Weight to Overweight in March 2025, citing top-line momentum, e-commerce share gains, and margin benefits from the removal of transitional supply chain costs. Conversely, JPMorgan upgraded the stock only to Neutral from Underweight in July, maintaining a price target of A$20.00 and expressing concerns about operating deleverage due to lower sales and higher wage costs.

The competitive dynamic between Coles and Woolworths remains a critical factor in valuation assessments. Goldman Sachs’ analysis of a 17-day strike at Woolworths distribution centers in December 2024 estimated that Coles could benefit incrementally by between A$4 million to A$27 million, representing 0.2% to 1.3% of full-year earnings. While such events provide short-term opportunities, they underscore the tight competitive environment in which both supermarkets operate, where market share gains often come at the expense of direct rivals.

Looking ahead, Coles faces a delicate balancing act between maintaining market share, managing cost inflation, and navigating regulatory pressures while attempting to expand margins through operational efficiency. The company’s e-commerce initiatives and supply chain optimization efforts represent potential growth drivers, though execution risk remains as consumer spending patterns continue to evolve. Goldman Sachs’ expectation that Woolworths will narrow the valuation gap suggests that relative performance between the two supermarket giants will be a key determinant of share price movements in the coming quarters.

The Neutral rating from Goldman Sachs reflects a market at an inflection point, where Coles’ recent outperformance has been largely priced in, leaving the stock vulnerable to any operational missteps while offering limited upside unless the company can demonstrate sustained earnings growth that exceeds current market expectations.