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Date : 10/05/2024

Coles Group (ASX: COL) Q3 Analysis: Growth Opportunities Amidst a Challenging Market

Coles Group Ltd (ASX: COL) is drawing significant attention from analysts following the announcement of their fiscal year 2024 third-quarter sales figures. The company operates across three key segments: supermarkets, liquor, and a supply agreement with Viva Energy Group Ltd (ASX: VEA), subsequent to the divestiture of Coles Express.

Coles Group (ASX: COL) First Half 2024 Financial Overview

COL shares are trading at $16.09 and surged by around 4% in the previous 6 months. The company’s current market is approximately 21.55B AUD.

Coles Group Ltd shares analysis

  1. Revenue: Reached AU$22.3 billion, marking a 6.7% increase from the first half of 2023.
  2. Net Income: Declined by 3.6% to AU$594.0 million compared to the same period last year.
  3. Profit Margin: Dropped to 2.7% from 3.0% in the first half of 2023, primarily due to escalated expenses.
  4. Earnings Per Share (EPS): Slightly decreased to AU$0.45 from AU$0.46 in the first half of 2023.
  5. Cash and Short-term Investments: Surged impressively by 56.45% to AU$1.09 billion.

 COL: What Happened During the 3rd Quarter?

Coles reported a robust third-quarter performance for the period from January 1 to March 24, 2024. Supermarket sales saw a rise of 5.1%, reaching $9.07 billion, while liquor sales experienced a slight decline of 1.9%, totalling $786 million. Overall, total sales revenue ascended by 3.4% to $10.03 billion.

Inflation metrics indicated a 2.9% increase excluding tobacco and fresh items, with total inflation marking at 2.2%. E-commerce continued its upward trajectory, with online supermarket sales surging by 34.9% and online liquor sales growing by 4.1%.

Early indicators for the fourth quarter show continued positive volume trends in the supermarket segment, supported by effective value campaigns and robust trade plan executions. The company has noted deflation in fresh produce and meat, alongside moderated inflation across broader packaged goods categories. Furthermore, Coles has made significant strides in reducing losses, a trend expected to persist into the fourth Quarter. However, the liquor segment may continue facing subdued discretionary spending, mirroring third-quarter performance levels.

Should You Buy COL?

Post-update, UBS analysts have revised their forecasts upward, enhancing their earnings per share (EPS) estimates for FY24 and FY25 by 6.2% and 8.7%, respectively. This adjustment stems from anticipated higher earnings before interest and tax (EBIT) due to increased sales and reduced costs of doing business. Nevertheless, these profit gains are likely to be tempered by lower EBIT in the liquor segment.

Several factors could bolster Coles’ profitability going forward. Past challenges with theft have set the stage for an improvement in gross profit margins in 2024, alongside benefits from ongoing promotional management efforts. Additionally, efficiencies from the Witron automated distribution centres are expected to further reduce costs, amplifying cost savings at the store level. These initiatives, along with the ‘simplify and save to invest’ strategy, are projected to sustain positive earnings momentum.

Given these dynamics, UBS has endorsed Coles shares as a buy, setting a target price of $18.25, which suggests an 11% potential increase over the next year. They predict an EPS of 86 cents for FY25 and anticipate an annual dividend per share of 75 cents. At the current price, this positions Coles at 19 times the projected FY25 earnings, with an enticing grossed-up dividend yield of 6.5%.

Conclusion

In conclusion, Coles Group Ltd has demonstrated resilience and strategic agility in its third-quarter performance, navigating through varying market conditions. With solid growth in supermarket sales and promising initiatives to streamline operations and enhance profitability, Coles appears well-positioned for future growth. The comprehensive analysis by UBS, upgrading Coles’ financial outlook and setting a robust price target, reflects an optimistic forecast for the company’s financial health. Investors looking for a potentially rewarding opportunity might find Coles shares an attractive proposition, especially considering the strategic initiatives in place and the expected improvement in earnings. This makes Coles a compelling consideration for those aiming to diversify their portfolio with a stable and growing retail player.

 

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