Earnings of Australia's top supermarket chains are likely to show constricted spending presenting a challenging outlook for Woolworths and Coles, as consumers deal with painfully high mortgage rates and sticky inflation.

Decade-high interest rates and stubborn inflation still running above the central bank's target range has prompted consumers to be mindful of their spending, analysts warned.

The results will show the impact of a protracted cost of living crisis on the companies, which ring up two-thirds of every Australian dollar spent on groceries and are closely watched as barometers of the wider economy.

Consumers are becoming more discerning by trading down in items such as food by choosing lower-priced items and more at-home consumption, UBS analysts wrote in a note.

Woolworths and Coles "face headwinds over the next 12 months because it's unlikely the economic outlook will improve due to the higher rate environment," said Kyle Rodda, senior financial market analyst at Capital.com.

The softening in consumer demand should be reflected in their earnings, he added.

Woolworths is set to report annual results on Aug. 28 while smaller rival Coles will report on Aug. 27. Analysts on average expect Coles to fare better.

Coles has said it expects more volume growth after a surge in supermarket sales in the third quarter in contrast to Woolworths which posted weak food sales.

"With cost-of-living pressures remaining a hot topic, I expect that the profit margins of the big supermarket chains will again be under the microscope," said Tim Waterer, KCM Trade's chief market analyst.

Jefferies analysts see underlying earnings margin expansion for Coles, rebounding from a period of margin contraction in the prior year and due to benefits from initiatives to connect brands with customers.

Meanwhile, Australian food underlying earnings margin for Woolworths is expected to contract due to increased business costs and supply chain investments.

Net profit after tax (NPAT) from continuing operations for fiscal 2024 is expected to come in at A$1.10 billion ($737.99 million) for Coles, slightly higher than A$1.04 billion in the prior year, according to Jefferies' estimates.

However, NPAT before significant items for Woolworths is expected to decline to A$1.67 billion, from A$1.72 billion last year.

Woolworths could also announce a special dividend along with its annual results, from the proceeds of its stake sale in liquor store and pub operator Endeavour Group, according to analysts.

  - Reuters