Coles Group: Cycling COVID lockdowns

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Alex Lu
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By Alex Lu
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Date posted:
27 October 2022, 7:30 AM
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  • Coles Group’s (ASX:COL) 1Q23 sales trading update reflected the cycling of COVID lockdowns in the pcp with growth overall that was slightly above our expectations.
  • LFL sales growth: Supermarkets +2.1% (vs MorgansF -1.2%); Liquor -4.1% (vs MorgansF -3.5%); and Express (c-store) +9.0% (vs MorgansF +8.5%). 
  • Management said sales, volumes and transactions strengthened through 1Q23 and has continued into 2Q23.
  • FY23-25F underlying EBIT changes by between -1% and 0%.
  • Our target price decreases to (login to view) and we maintain our Add rating.

Supermarkets sales growth was better than expected

Supermarkets LFL sales increased 2.1% (vs MorgansF -1.2%) despite cycling heightened COVID-related sales in the pcp and customers returning to dining out at cafes and restaurants.

Volumes were lower after cycling elevated demand in the pcp and declines in fresh produce volumes as a result of floods impacting supply. COL said better availability saw volumes improve through the quarter, as did transactions as local shopping trends continue to unwind.

The unwinding of local shopping has resulted in COL seeing an uptick in market share following losses over the past few years.

Supermarkets price inflation was 7.1% vs 4.3% in 4Q22. Fresh inflation was 8.8% and continued to be driven by bakery (higher wheat prices) and fresh produce (eg, berries and bananas). In packaged food, raw materials, commodity, shipping and fuel costs remained the key drivers of supplier input cost requests received.

Online sales fell 11.5% as sales normalised post COVID lockdowns with some customers returning to shopping in store. Online now represents 7.6% of Supermarkets sales vs 8.8% in the pcp.

Liquor result was decent

Liquor LFL sales fell 4.1% (vs MorgansF -3.5%) as the business cycled COVID lockdowns in NSW, VIC and the ACT in the pcp. Excluding these states and their bulk sales, Liquor sales grew in the quarter. 

Liquorland was the strongest performing banner while at a category level, Ready-To-Drink (RTD) was a key driver of growth.

Online sales rose 3.9% despite cycling strong sales in the pcp with penetration of 5.0% compared to 4.5% in the pcp. The result was a positive surprise given the easing of restrictions across the country and compared favourably to Endeavour Group’s (EDV) 290bp decline in penetration to 8.6% during the quarter.


Management said sales, volumes and transactions strengthened through 1Q23, which has continued into 2Q23 with improvements in availability and the introduction of new value campaigns.

COL expects cost price inflation to increase in 2Q23 given the ongoing level of supplier CPI requests as well as floods impacting supply volumes.

COL noted it is not immune to inflationary cost pressures, including the impact from higher logistics and fuel costs, salary and wages and construction costs on capex projects.

Changes to earnings forecasts and investment view

We make minor adjustments to earnings forecasts with FY23F/FY24F/FY25F underlying EBIT changing by -1%/0%/0%.

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

Trading on 20.6x FY23F PE and 4.0% yield, we continue to see COL as offering good value with the company’s solid balance sheet and defensive characteristics putting it in a good position to navigate through a weaker economic environment. The unwinding of local shopping should also help further market share gains.


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

Disruptions due to COVID remain an ongoing risk.

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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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