Coles Group: Still going strong

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Alex Lu
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By Alex Lu
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Date posted:
19 August 2021, 7:00 AM
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  • Coles Group's (ASX:COL) FY21 result was slightly above our expectations but in line with Bloomberg consensus forecasts.
  • Divisional EBIT: Supermarkets +5% (1% above Morgans); Liquor +20% (5% above Morgans); and Express +103% (30% above Morgans).
  • COL advised that for the first seven weeks of 1Q22, Supermarket headline sales were up ~1% (or +12% on a 2-year basis) while Liquor sales were flat (or +19% on a 2-year basis).
  • We increase FY22F EBIT by 2% to A$1,852m while underlying NPAT rises by 4% to A$996m. Our target price rises to (login to view) and we maintain our Add rating. COL remains our key pick in the Supermarkets sector.  

Solid FY21 result

FY21 EBIT was up 6% to A$1,873m (2% above Morgans and in line with Bloomberg consensus) and underlying NPAT rose 3% to A$1,005m (2% above Morgans and in line with Bloomberg consensus).

All divisions delivered earnings growth above our expectations with margin improvement (Supermarkets EBIT margin +13bp to 5.0%; Liquor +49bp to 4.7%; and Express +270bp to 5.7%) supported by Smarter Selling benefits (~A$300m in FY21) and good cost control despite higher investment spend (marketing, coles&co, digital and technology, etc).

The balance sheet remains healthy with net debt of only A$355m (leverage 2.8x) leaving plenty of capacity for COL to pursue its medium-term investment plans (data, eCommerce, technology, automation, range, stores and sustainability) while maintaining the group’s target dividend payout ratio of 80-90%.  

Divisional summary

Supermarkets FY21 LFL sales grew 2.5% (or 8.4% on a 2-year basis) driven by elevated in-home consumption, promotional programs and strength in eCommerce. Coles lost market share in 4Q20 and 1H21 as consumers shopped more locally and avoided shopping centres.

While COL was able to restore its market share back to pre-COVID levels towards the end of FY21, recent lockdowns (eg, NSW/VIC) have seen the re-emergence of this ‘local shopping’ trend. While this will negatively impact COL in the short term, history suggests that market share will revert when economies reopen, likely in CY22 as vaccination rates increase.

Liquor FY21 LFL sales increased 6.3% (or 13.6% on a 2-year basis) with growth across all banners, categories and states as well as strength in eCommerce (FY21 sales +79%). The Liquor refresh strategy seems to be going well so far with management advising that the Liquorland and Vintage Cellar renewals are resonating well with customers. In our view, the key will be how the division performs in a post-COVID environment.

Express (c-store) FY21 LFL sales rose 6.8% (or 11.4% on a 2-year basis) with growth largely driven by food-to-go (including coffee) and cold drinks as well as recent investments (eg, new self-serve coffee machines) and benefits from the drinks range review in the prior year.


Management advised that for the first seven weeks of 1Q22, Supermarket headline sales were up ~1% (or +12% on a 2-year basis) while Liquor sales were flat (or +19% on a 2-year basis). Express fuel volumes have been negatively impacted by lockdowns.

For FY22, we forecast Supermarkets LFL sales growth of 1.8%, Liquor to increase by 1.7% and Express (c-store) to rise by 2.0%.

Changes to earnings forecasts and investment view

Following the better-than-expected FY21 result, we increase FY22F EBIT by 2% to A$1,852m while underlying NPAT rises by 4% to A$996m.

COL is a defensive business with strong market positions and a healthy balance sheet. Trading on 24.6x FY22F PE and 3.3% yield we continue to see the stock as offering good value and maintain our Add rating. Our equally-blended (DCF, SOTP, PE) target price rises to (login to view).

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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