Coles profit beat fails to inspire, warns that FY23 will cycle through more elevated sales

Coles (ASX: COL) warned that families are facing "increased pressure on household budgets due to rising inflation".

"As examples, we are beginning to see our customers buying significantly more $1 Coles pasta and our $1 coffee at Coles Express has never been more popular," the company said.

The bleak commentary appears to outweigh what was otherwise earnings beat across both the top and bottom line. Coles shares fell as much as -5.2% in early trade.

Results at a glance:

Source: Coles | Table: Market Index

Earnings beat: Not enough

The net profit figure of $1,048m was ahead of Bloomberg estimates of $990m.

Covid lockdowns in NSW, ACT and Victoria for much of the first half led to higher sales. Restrictions eased in the lead up to Christmas holidays, which helped sales growth remain elevated.

As the omicron variant came around in the second half, Coles observed the re-emergence of local shopping trends. Notwithstanding staffing shortages, covid seemed to have played favourably in buoying sales growth.

Encouragingly, Coles said covid related costs peaked at approximately $30m in January, and "significantly reduced over the remainder of the year to approximately $26m in the fourth quarter."

Inflation picks up but margins intact

Coles noted "total Supermarkets price inflation of 1.7% was recorded for the year and 4.3% for the fourth quarter."

"In the fourth quarter, fresh inflation was 4.7% and driven by both bakery, reflecting higher wheat prices, and fresh produce, due to the Queensland and New South Wales floods impacting supply."

Still, gross margins increased 42 bps year-on-year to 26.3% as a result of strategic sourcing an Smart Selling benefits such as supply chain and loss prevention initiatives.

Not the best forward looking narrative

As expected, Coles was light on guidance and expects the first-half of FY23 to cycle through lockdowns in the first-half of FY22 and price inflation in the second-half.

"In July, we have seen further cost price inflation in produce due to recent flooding, in bakery due to wheat commodity prices, and in packaged groceries due to various supply chain cost increases including wages, packaging, raw ingredients and freight," flagged Coles.

In addition, inflationary pressures were noted across cost base factors including wages, rent, fuel, supply chain and capital costs.

Even without a guidance, things sounded conservative at best.