Coles Group: Another disruptive quarter

About the author:

Alex Lu
Author name:
By Alex Lu
Job title:
Analyst
Date posted:
02 May 2022, 8:30 AM
Sectors Covered:
Industrials

  • Coles Group's (ASX:COL) 3Q22 sales update overall was slightly better than we expected, which was a good effort in our view given the major disruptions during the period.
  • 3Q22 LFL sales growth (yoy): Supermarkets +3.9% (vs MorgansF +3.6%), Liquor +2.8% (vs MorgansF +1.5%), Express (c-store) -0.8% (vs MorgansF +1.0%).
  • COL advised that sales in 4Q22 to date have been solid with no COVID related restrictions on traditional family events such as Easter. Supplier input cost inflation is expected to continue in 4Q22 and into FY23.
  • FY22F/FY23F/FY24F underlying EBIT changes by -1%/+1%/+1%.
  • Our target price increases to (login to view) and we retain our Add rating.

Supermarkets sales growth was solid

Supermarkets LFL sales increased 3.9% (vs MorgansF +3.6%) which benefitted from elevated demand in early January due to Omicron but was impacted by floods in NSW and QLD with supply challenges impacting availability and sales.

Availability issues saw the re-emergence of local shopping trends (consumers turning to specialty retailers) with the contribution from neighbourhood stores greater than shopping centre and CBD stores. However, management expects this to unwind as availability improves.

Online was again a key standout with sales growth of 45% reflecting increased capacity and Omicron-related isolation demand. Online now represents 7.8% of total sales vs 5.6% in the pcp.

Inflation steadily increased throughout the quarter with total Supermarkets price inflation at 3.3% (or 2.9% ex-tobacco and fresh) driven by packaged and fresh. Supplier inflation requests were related to raw material, commodity, shipping and fuel costs while fresh was driven by ongoing meat and vegetables price rises.

COL expects supplier input cost inflation to continue in 4Q22 and into FY23. 

COL incurred COVID costs of ~$65m during the quarter with costs peaking at $30m in January largely due to staff isolation requirements before tapering off meaningfully in February and March. COL expects COVID costs to continue to moderate in 4Q22, particularly as public health requirements ease.

Flood events resulted in $30m worth of losses in 3Q22 from loss of stock, asset write-offs and increased freight costs through rail and road disruptions. These costs do not include business interruption costs and there was no insurance recovery during the period.

Liquor performed well but Express was impacted by reduced mobility

Liquor LFL sales increased 2.8% (vs MorgansF +1.5%) with growth across all states despite the impact of floods. Rising Omicron cases early in the quarter also limited social gatherings, which impacted liquor consumption. At the category level, Ready-To-Drink (RTD) and Spirits were the key drivers of growth.

Online remains strong with sales up 50% representing 4.3% penetration vs 2.9% in the pcp.

In Express, convenience store LFL sales fell 0.8% (vs MorgansF +1.0%) due to the floods in NSW and QLD and reduced consumer mobility as a result of Omicron early in the quarter. While LFL fuel volumes declined 3.9%, management was confident in an improvement as restrictions ease.

Good start to 4Q22

COL advised that sales in 4Q22 to date have been solid with no COVID related restrictions on traditional family events such as Easter. Encouragingly, availability continues to improve as the supply chain recovers.

Changes to earnings forecasts and investment view

We decrease FY22F underlying EBIT by 1% after factoring in the impact from flood events while FY23F and FY24F earnings rise by 1% after assuming some higher inflation going forward.

Our equally-blended (DCF, SOTP, PE) target price increases to (login to view) following the earnings changes and a roll forward of our model to FY23 forecasts. Maintain Add rating.

Trading on 24.1x FY23F PE and 3.4% yield we continue to see COL as offering good value with the company possessing defensive characteristics and a strong balance sheet (1H22 net cash $54m) allowing ongoing investment for growth.

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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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