Coles Group: Setting the business up for the longer term

About the author:

Alex Lu
Author name:
By Alex Lu
Job title:
Analyst
Date posted:
17 June 2021, 5:00 PM
Sectors Covered:
Industrials

  • Coles Group (ASX:COL) hosted a virtual investor day today and outlined the key initiatives that will drive longer term growth.
  • This will require increased investment in areas such as data, eCommerce, technology, automation, range, stores and sustainability.
  • While no trading update was provided, management said that the normalisation in consumer behaviour that was seen in early 4Q21 has continued (ex-VIC).
  • FY21/FY22/FY23 EBIT changes by 0%/-6%/-7% mainly on the back of higher D&A.
  • Our target price falls to (Login to view) and we maintain our Add rating. We expect COL to continue to benefit from a normalisation in consumer behaviour and while increased investment will be negative for near-term earnings, the longer-term benefits should be positive.

Investing for growth

At its virtual strategy day today, Coles Group (ASX:COL) outlined plans to further drive long-term sales and efficiencies with increased investment in data, eCommerce, technology, and automation.

Product range was also a key focus with stores to offer a more tailored range to suit local tastes. Currently, ~27% of stores are tailored and COL said it is on track to tailor 40% of stores by FY23. Supporting the range will be ongoing expansion of the Own Brand portfolio that allows COL to differentiate through exclusive products.

COL will accelerate investment in Coles Local and Liquorland renewals and new store rollouts with a focus on high-quality locations and formats.

Smarter Selling on track

COL remains on track to deliver cumulative Smarter Selling benefits of A$550m by FY21 with incremental benefits of ~A$200m in FY22. The company reiterated its target of A$1bn by FY23 (excluding COGS benefits). The key purpose of Smarter Selling is to offset cost inflation and allow re-investment back into the business.

We see the potential for the increased investment in FY22 to drive further efficiency benefits post completion of the Smarter Selling program in FY23.

Higher capex and D&A

Due to the increased investment, management has forecast FY22 capex to rise to ~A$1.4bn vs ~A$1.1bn in FY21.

FY22 D&A is expected to increase to A$1.67-1.72bn.

Changes to earnings forecasts

We make no changes to FY21 forecasts but decrease FY22 and FY23 EBIT by 6% and 7% respectively, largely on the back of updated D&A forecasts. We assume minimal top-line benefits in the short term.

We forecast total capex of A$1.4bn in FY22, falling to A$1.2bn in FY23.

Investment view

Our equally-blended (DCF, SOTP, PE) target price falls to (Login to view) and we maintain our Add rating.

We expect COL to continue to benefit from a normalisation in consumer behaviour and while near-term capex will be elevated, this can be supported by the strong balance sheet with 1H21 net cash at A$38m (ex-leases).

We are also happy to back management to generate attractive returns on the increased investments over the longer term given good progress to date with Smarter Selling initiatives.

Risks:

Key downside risks include slower-than-expected sales growth, failure to tailor the product range to keep up with consumer tastes, being too slow to adapt to new consumer trends, entry of new competitors, pricing pressure and rising costs.

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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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