Options traders and short sellers are betting that Woolworths Ltd will end up the loser in a price war among Australia’s largest supermarkets.

Short interest in Woolworths is near the highest on record, equaling 6.9 percent of outstanding stock after more than doubling this year. Equity derivatives that pay out if the shares decline are the most expensive since 2012. The shares slumped 18 percent in the past 12 months.

Woolworths, the biggest supermarket chain in Australia which made about $32 billion in food and liquor sales last fiscal year, is reducing prices to fend off Wesfarmers Ltd.’s Coles and German discounter Aldi. Chief executive Grant O’Brien, who has pledged to restore the double-digit earnings growth that characterized the company for more than a decade, last month unveiled a profit-forecast cut that sent the stock down by the most since 2008.

“Woolworths is falling short of lofty expectations and being punished,” said Crispin Murray, Sydney-based head of equities at BT Investment Management Ltd., which manages about $55 billion. “Woolworths is facing a number of structural pressures that will lead it to underperform.”

Analysts expect retaliation from Coles and Aldi to price cuts, leading to weaker sales growth and declining profitability across the supermarket industry. Staples are getting cheaper, with Woolworths lowering prices of bread, milk and toilet tissue.


David Errington at Bank of America Corp. doesn’t like the other parts of Woolworths’ business either, calling for the company to jettison its Big W mid-range department store chain and its Masters hardware division, which posted a $112 million first-half loss. Units other than Woolworths’ supermarkets provide about 13 percent of the company’s revenue.

Options that pay out on a 10 percent decline in Woolworths shares cost 5.3 points more than contracts betting on a 10 percent gain, according to three-month data compiled by Bloomberg. The relationship known as skew climbed to the highest since June 2012 on March 24.

It’s “likely to get worse before it gets better,” said Ben Gilbert, Sydney-based analyst at UBS Group AG who advises selling the shares. “Woolworths has lost momentum and needs to reinvest in its business to regain the trust of consumers and win share back from its rivals.”

Claire Kimball, a spokeswoman for Woolworths in Sydney, declined to comment on the options trading. The shares lost 0.7 percent to $29.425 at 12:14 p.m. on Monday in Sydney.

Short interest on outstanding shares surged to 7.6 percent on March 23, according to data compiled by Markit Ltd. and Bloomberg. That was the highest level since the year data began in 2006. It’s risen from 2.9 percent at the end of last year. Ten of the 16 analysts researching Woolworths tracked by Bloomberg advise selling the shares.


Woolworths’ 18 percent share-price slide in the past 12 months compares with an 11 percent gain on Australia’s benchmark equities gauge, the S&P/ASX 200 Index. That’s left the company trading at 14.9 times estimated earnings, compared with 20.5 times for its rival Wesfarmers, according to data compiled by Bloomberg.

A struggling Australian economy isn’t helping the consumer firm. The country’s central bank lowered its growth and inflation forecasts in its quarterly monetary policy statement last month. Without signs of inflation, the stock will continue to trail the benchmark index, said Ben Le Brun at OptionsXpress Australia.

“There’s no support for the share price for the foreseeable future,” said Le Brun, Sydney-based market analyst at OptionsXpress, a unit of Charles Schwab Corp., which trades futures and options. “You’d need to see inflation creeping back into the Australia economy and when we see that it’ll have a knock on effect to Woolworths.”


Profit will increase at a pace in the lower end of a 1.8 percent to 6.6 percent range in the current fiscal year, Mr O’Brien said on February 27. That was just three months after the Sydney-based firm reaffirmed its forecast for earnings to expand in a 4 percent to 7 percent range. Tjeerd Jegen, Woolworths’ managing director for supermarkets and petrol, left last month.

“With elevated earnings risks, investors should continue to avoid the Australian supermarkets,” said Thomas Kierath, Sydney-based analyst at Morgan Stanley. “Margins now appear to have begun declining.”

Extracted in full from Australian Financial Review.