Coles Group: Juggling a lot of things at once

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Alex Lu
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By Alex Lu
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Date posted:
23 August 2023, 7:30 AM
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  • Coles Group's (ASX:COL) FY23 result was below expectations with margins impacted by cost inflation, particularly related to labour, total loss, and D&A.
  • Key positives: Supermarkets product availability and volumes improved through the year; Liquor EBIT was 8% above our forecast with strong 2H23 EBIT growth (+20%) and margin improvement (+70bp).
  • Key negatives: Supermarkets EBIT margin fell 20bp to 4.8%; Total loss (including stock loss) jumped ~20%; Ocado total capex is now expected to be ~$400m vs ~$330m previously with commissioning delays to both the NSW and VIC CFCs.
  • Management said Supermarket volumes have been modestly positive in the early part of FY24 with early signs that customers are shifting from out of home dining.
  • We decrease FY24-26F underlying EBIT by between 3-6% while underlying NPAT reduces by 5-9% due mainly to higher net interest expense.
  • Our target price falls to (login to view) and we move our rating to Hold (from Add). COL is trading on 21.4x FY24F PE and 4.1% yield. While we expect COL’s sales growth to remain solid, there is increased risk to earnings from higher costs and execution risk with major project implementation. We hence prefer to wait for more clarity on the cost environment before potentially reassessing our view.

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