Bears Feast on Coles in Raging Battle of Australian Supermarkets

(Bloomberg) -- Shares of Coles Group Ltd. have been trading for only a week, and bears are already piling in. Its biggest rival, on the other hand, is doing just fine.

Short interest in the Wesfarmers Ltd. spinoff climbed to more than 12 percent of its equity float as of Nov. 23, five times more than Woolworths Group Ltd., according to the latest Australian Securities & Investments Commission data published Thursday. The two supermarket giants account for about 70 percent of the Australian grocery market, Wesfarmers has said.

Coles’ return to the stock exchange is reviving a direct Australian supermarket pair trade that hadn’t existed since 2007, when Wesfarmers bought the company.

“It’s essentially Coles against Woolies now,” said Jun Bei Liu, a fund manager at Tribeca Investment Partners in Sydney. “It’s actually quite interesting to see how they may perform.”

Woolworths should be trading at a premium given the prospects of good growth and capital returns in the next year, while Coles will be spending money reinvesting in its business, she said.

Read: Here’s why Wesfarmers got rid of Coles

Analysts echoed that sentiment in an Ord Minnett Ltd. branded note to clients on Nov. 29. While the outlook for the food-retail industry is improving and provides a reliable earnings stream, Coles is “not as defensive as Woolworths,” they wrote. “And valuation support is not as compelling.”

Coles shares have slipped 2.8 percent since their listing on concerns over slowing sales growth, flat margins and a dividend cut as competition increases. Meanwhile, Woolworths has climbed 4.6 percent thanks to revenue optimism. Its comparable sales have risen more than Coles’ in seven of the past eight quarters.

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