Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Why Coles is beating Woolies post the pandemic
The Coles Group Ltd (ASX: COL) share price is in focus after the supermarket business reported its FY22 half-year result.
Coles HY22 result
Coles reported several financial metrics for investors to look at:
- Sales revenue grew 1% to $20.6 billion
- EBITDA down 2.2% to $1.76 billion
- EBIT down 4.4% to $975 million
- Net profit after tax down 2% to $549 million
- Interim dividend of $0.33 per share, 0% change
The company was cycling strong growth in the prior year, so managing to achieve sales growth was pretty good. Over two years, supermarket sales grew by 8.6% and liquor sales were up 18.2%.
In this result, year-on-year, supermarket sales were up 1.1% to $18 billion, liquor sales were up 2.7% and Express sales fell 8.5% to $578 million.
Supermarket e-commerce sales grew by 46%. It has grown the number of rapid click & collect stores (order to pickup in 90 mins) to 430 as well as increasing the number of same-day home delivery stores to around 500. Liquor e-commerce sales jumped 60% – it now has four dark e-commerce stores in NSW.
Smarter selling
Coles said that it delivered smarter selling benefits of more than $100 million in the first half of FY22 and is on track to deliver benefits of over $200 million in FY22. This might be supportive of earnings and the Coles share price in the next couple of years.
One strategy has been to reduce loss in-store through the use of artificial intelligence with ‘dynamic markdowns’ rolled out to the dairy category, after successful deployment in meant last year.
Another tactic has been the alignment of meat operating models with reduced wastage and a safer working environment.
Coles also said that there has been a service transformation in stores with the continued rollout of trolley-assisted checkouts and customer bagging benches – it gives customers more choice and helps store productivity.
The business also pointed to e-commerce efficiency benefits with a continued focus on improved pick efficiencies and delivery van optimisation.
It’s also providing transport solutions and other value add services to suppliers through ‘Coles Collect’ with revenue growth of 20%.
Automated distribution centres
Coles is working on two major automated distribution centres – one in Queensland and one in Sydney. The Witron Queensland one will be commissioned in 2023, with the Sydney one to be commissioned in FY24. The Ocado Melbourne e-commerce customer fulfilment centre is delayed to FY24.
The supermarket business is investing significantly in its digital platforms. Coles will manage the online store and web presence for the intake of orders, whilst Ocado’s Smart Platform (OSP) will provide the automated fulfilment functionality as well as last-mile solutions.
Fair Work Ombudsman (FWO) proceedings
Coles is conducting a remediation program for staff that may have been underpaid. It has incurred $13 million of remediation costs with a further $12 million currently provisioned.
FWO is investigating this and has filed proceedings in the Federal Court and alleges that Coles is obligated to pay a further $108 million for 7,687 staff for the period between 1 January 2017 to 31 March 2020.
Coles is assessing the claims and preparing a defence.
Outlook and my thoughts on the Coles share price
COVID-19 has continued to cause variable impacts on Coles stores. Supermarket sales were elevated in early January, but then moderated later in the month. But Coles said that floods in South Australia have had an impact on sales, particularly in Western Australia.
In January, it suffered $30 million of COVID costs because of the large number of COVID isolations. This has moderated in February.
Coles has been a solid performer since the start of COVID. But I’m not sure what is the right earnings multiple valuation for Coles is with sales that are now barely moving and a rising interest rate environment. Income-focused investors may like the dividend yield, but I think there are other ASX dividend shares that could be better options.
If you’re anything like me, you might be thinking now is a good time to have cash ‘sitting on the sidelines’.
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