Consumer ‘shift to value’ takes toll on Coles 1Q FY23 result

Within a first quarter defined by a consumer shift to value and the unwinding of local shopping as consumer shopping behaviour normalises, Coles (ASX: COL) only managed to deliver a modest 1.3% increase group sales to $9.9bn.

Within what was a mixed-bag result, the three months ended 30 September saw Coles report a 1.6% increase in its flagship supermarket sales to $8,771m, 8.4% lift in Express sales to $284m, while liquor sales declined -4.3% to $836m. 

The group also reported three-year headline sales growth of 13.8% in supermarkets, 15.2% in liquor and 7.5% in Express.

Cycling

Management was quick to defend its first quarter FY23 result in light of supermarkets cycling heightened covid-related sales in the previous period, with customers returning to dining out at cafes and restaurants.

Management also noted that first quarter sales were supported by strong trade plans, including the ‘LOCKED’ value campaign as well as the Harry Potter “Magical Builders” collectibles and the Schott Zwiesel glassware customer continuity programs.

Commenting on today’s update CEO Steven Cain noted:

“Despite record levels of hospitality expenditure in Australia, we are pleased that a strengthening sales trajectory is being driven by improved availability, new value campaigns, and the unwind of local shopping as consumer shopping behaviour normalises.”

The group also benefitted from price inflation of 7.1% recorded for the first quarter compared to 4.3% in the fourth quarter.

First Quarter Sales - 13 weeks from 27 June 2022 to 25 September 2022

Source: Coles

Notable highlights with today’s update

• In supermarkets, e-commerce sales declined -11.5% as sales normalised post covid lockdowns.

• Fresh inflation was 8.8% driven by bakery, reflecting higher wheat prices, and fresh produce, particularly in fruit such as berries and bananas.

• In liquor e-commerce delivered sales revenue growth of 3.9%.

• Three-year e-commerce sale growth of 105% in supermarkets and 348% in liquor.

• Fuel volumes increased by 19.8% during the quarter.

Outlook

While strong sales, and volumes have continued into second quarter FY23, management remined investors that the company is not immune to the inflationary cost pressures, including the impact from increased logistics and fuel costs, salary and wages and construction costs on capital expenditure projects.

As a result, management expects the group depreciation and amortisation expense to be around $1.7bn in FY23, up from $1.52bn in FY 2022, which could put pressure on its profit margins.

The group also expects to deliver cumulative ‘Smarter Selling’ benefits of $1bn by end of FY23 under its four-year program to drive more savings and efficiencies.

What brokers think

Coles share price is down -5.25% over 12 months.

Consensus on Coles is Hold.

Based on Morningstar’s fair value of $15.14 the stock appears to be overvalued.

While the first quarter result was in-line with Goldman Sachs expectations, the broker reiterates a Sell rating (target price $15) following concerning margin/expense trends.

The broker notes that total inflation of 7.1% implies that volumes were likely mid-digit negative, which would be a further softening of the 1% decline in the fourth quarter.

Based on the six brokers that cover Coles (as reported on by FN Arena) the stock is currently trading with 12.9% upside to the target price of $18.40.

UBS, which is Neutral-rated on Cole with a price target of $17.50, has lowered its FY23 earnings per share (EPS) forecast due to a volume shift away from supermarkets. 

Coles share price over 12 months.