Coles delivers solid 3Q sales growth amid tough trading conditions: Outlook Improves

Coles Group (ASX: COL) may receive a welcome kicker this morning after the retail giant’s third quarter update revealed solid sales growth across its supermarkets and liquor businesses.

Overall, supermarket sales rose 4.2% to $8.23bn with comparable sales up 3.9% - slightly ahead of consensus forecasts - while sales rose 3.6% on-year to $9.1bn despite covid disruptions, floods and the impact of cost price inflation on suppliers.

Equally noteworthy was inflation which steadily increased during the quarter with total supermarkets price inflation of 3.3% compared to deflation of 0.2% in the second quarter.

Quarterly highlights included:

• Supermarkets sales up 4.2% to $8,226m

• Liquor sales up 2.8% to $784m

• Express sales down -2.1% to $285m

• Flood event costs of $30m and covid costs of $65m

• Covid costs peaked at $30m in January

• Direct cost of floods in NSW and Qld plus stock losses, asset write-offs and increased freight costs from rail and road disruptions was $40m

Upside and inflation

While supplier input cost inflation is expected to continue in the fourth quarter and FY23, covid-related restrictions are no longer an issue.

Adding to concerns over higher prices, food price inflation accelerated in the March quarter and food prices recorded their highest year-on-year rise in more than a decade.

Grocery suppliers have already flagged that more price rises are yet to come.

Ongoing inflation in fresh foods, especially meat was due to elevated livestock prices, and inflation in fresh produce was driven by vegetables such as cucumbers, broccoli and tomatoes.

Management noted that supplies are getting back to normal as supply chain issues improve, and covid costs continue to dissipate, especially as public health requirements ease.

Coles share price: A 12-month snapshot.

Consensus on Coles is Moderate Buy.

Based on Morningstar's fair value of $15.02, the stock appears to be overvalued.