Coles Group Ltd (ASX: COL) is a large Australian retailer, providing customers with everyday products including fresh food, groceries, household goods, liquor, fuel and financial services via its store network and online platforms. The Coles supermarkets segment accounts for most of the group’s sales and earnings. Coles is the second-largest Australian grocery retailer behind Woolworths Group Ltd (ASX: WOW), with a market share of around 29% of the grocery market compared Woolworths market share of around 37%.

What are the key features of the March quarter 2020 sales result?

Coles’ total March quarter 2020 sales revenue increased by 12.9% to $9.2 billion ($8.2 billion in the December quarter 2019).

Supermarkets performed strongly in January and February prior to the impact of COVID-19, and achieved comparable sales growth of 13.1% for the March quarter 2020. In late February, Supermarket sales growth was impacted by customer stockpiling as a result of rising concerns relating to COVID-19, which continued throughout March. This unprecedented demand led Coles to begin placing product limits per customer in certain categories from early March. Further, in mid-March, Government imposed social distancing measures led to more Australians working and spending more time at home, which in turn led to greater at home consumption of meals and other household items. The significant demand was seen across all categories, particularly grocery, health & home and meat.

Liquor was negatively impacted by bushfire smog over capital cities and floods in January and February (which has a negative impact of sales growth), before being impacted by COVID-19 later in the quarter (which has a positive impact on sales growth). Liquor achieved comparable sales growth of 7.2% for the March quarter 2020.

Overall, Express revenue increased by 4.3% on a comparable store basis in the March quarter 2020. There was some uplift in Convenience sales in March as a result of the same pantry stocking experienced in Supermarkets. However, this was offset by lower fuel volumes late in March, with less road traffic due to social distancing measures requiring people to largely remain at home. While weekly fuel volumes peaked at approximately 70mL during the quarter, the business exited the quarter at approximately 50mL per week.

What is the outlook for Coles Group?

In the short term, issues related to COVID-19 will continue to impact on Coles businesses. The extend of this impact will depend on the extent or timing of the existing or any future Government measures, as well as when measures may also start to ease. Higher unemployment for an extended period of time could also have a negative impact. There could also be longer term behavioural changes in consumer spending patterns once COVID-19 issues subside.

Coles management noted that in the first four weeks of the June quarter 2020, which included the Easter period and ANZAC Day, supermarkets comparable sales growth has broadly trended back toward the levels seen in the early part of the March quarter 2020 (pre COVID-19). During this period, Coles has seen an increase in basket size which has been partially offset by a decline in transactions driven by social distancing measures.

Coles management also noted that while Coles experienced a sales uplift in the March quarter 2020, expenses running the businesses were also elevated. These expenses include incremental costs associated with cleaning and security measures implemented due to COVID-19 pandemic to ensure stores are a safe place to work and shop for staff and customers. In addition, three pop-up distribution centres were opened in New South Wales, Victoria and Queensland which increased capacity in each state. Further, Coles invested in customer service which included hiring an additional 12,000 people to ensure improved stock replenishment during the period of increased demand. However, Coles’ management did not provide any guidance on the magnitude of this elevation in costs, nor did that provide guidance on the extent of earnings growth due to the above normal growth in sales due to COVID-19.

What is the market reaction to Coles March quarter sales result?

The market reaction to Coles’ sales report is negative, with its share price is down 3.4%. The result has also impacted of Woolworths’ share price which is down by 2.2%. In contrast, the broadly market is up by around 1%. Coles is currently trading at A$15.50. Coles trades at a forward P/E ratio in the low twenties and has an annual dividend yield of around 3.5%.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.

April 29, 2020