Woolworths is Australia's largest supermarket operator, running over 1,100 stores across food retail, B2B wholesale, New Zealand grocery, and the BIG W and Petstock non-food businesses. At A$36.35 versus our fair value of A$41.37, the stock is undervalued by 14%. The key driver is straightforward: once the Federal Court resolves outstanding payroll penalty proceedings — expected in FY27 — the regulatory discount embedded in the current multiple should compress, re-rating the stock toward fair value.

Woolworths is best suited to the value investor. The discount to fair value is specific and identifiable — a regulatory overhang with a court-set timetable — not a vague macro headwind. The business is fundamentally sound, cash flow is strong and predictable, and the 14% upside to fair value is underwritten by a multiple re-rating rather than aggressive earnings upgrades. Patience is required, but the catalyst is visible.

Woolworths operates Australia's largest supermarket network alongside B2B food service, New Zealand grocery, BIG W discount retail, and Petstock. It earns money the old-fashioned way — high volume, thin margins, structurally negative working capital — and increasingly through a capital-light services layer: the Cartology retail media platform and the Everyday Rewards loyalty programme, which together are contributing over 40% of Australian Food earnings growth.

The first half of FY26 showed genuine momentum. Australian Food comparable sales grew 5.8% in the third quarter excluding the tobacco category Woolworths is exiting. eCommerce penetration reached 15.6%, and the digital advertising platform (DAP) margin hit 3.6%, proving that online grocery can be profitable at scale in Australia. BIG W swung sharply back to profitability. The payroll underpayment provision of $836 million sits on the balance sheet, but the underlying operating business is recovering clearly.

The investment case rests on three things. Supply chain completion in FY28 removes $110 million in annual dual-running costs and begins delivering the guided return on investment. The Cartology-Rewards flywheel adds structural margin above pure grocery equilibrium. And Federal Court resolution of the payroll proceedings — expected FY27 — removes the primary reason the stock trades at a 10–18% discount to historical and peer multiples. At A$36.35 versus fair value of A$41.37, the stock is undervalued by 14%.

What happened?

The first half of FY26 marked a decisive turn. Australian Food comparable sales accelerated to 5.8% in the third quarter once tobacco exits are stripped out, reversing six quarters of volume pressure. BIG W returned to profitability — EBIT up 122% half-on-half — as cost discipline and cleaner inventory management took hold. eCommerce grew 10.6% and is now genuinely profitable, with the digital advertising margin reaching 3.6%. Supply chain dual-running costs of $110 million are suppressing near-term EBIT, but that drag disappears entirely in FY28 when the new customer fulfilment centres are fully commissioned.

What's next?

The FY27 earnings step-up is the most important near-term event. EBIT is forecast to grow 18% as supply chain costs begin to reduce and Australian Food volumes continue recovering. FY28 is where the investment thesis fully materialises: the $110 million dual-running cost disappears, the new automated fulfilment centres reach operating scale, and EBITDA margins expand toward 8.9%.

Two external events carry significant weight. The Federal Court is expected to hand down the payroll penalty determination in FY27 — if penalties land near or below the $836 million provision, the regulatory discount compressing the multiple resolves cleanly. Separately, the ACCC grocery pricing proceedings remain unresolved and unprovisioned. Management has not quantified this exposure, which is the single genuine uncertainty in the near-term outlook. The full-year FY26 result in August 2026 will be the first clean read on whether the operating recovery is tracking forecasts.

What could go wrong?

The single biggest risk is the ACCC grocery pricing case. Unlike the payroll proceedings — where an $836 million provision provides a financial buffer — Woolworths has booked zero dollars against a potential ACCC penalty. The payroll case established that self-reporting and cooperation reduce but do not eliminate penalties. If the ACCC succeeds and the court orders structural changes to Woolworths' promotional pricing architecture rather than a simple financial penalty, the impact falls directly on gross margins and is permanent, not one-off. Every 20 basis points of gross margin lost permanently reduces fair value by approximately $2 per share. Investors should watch the ACCC hearing date announcement — currently unscheduled — as the key risk event. Until the scope of that proceeding is clarified, the ACCC overhang is genuinely unquantifiable, which is precisely why it continues to weigh on the multiple.