Coles Group: Some encouraging signs

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Alex Lu
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By Alex Lu
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Date posted:
28 April 2021, 3:30 PM
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  • While Coles Group's (ASX:COL) 3Q21 sales trading update overall was weaker than we expected, there were some encouraging signs with management starting to see a normalisation in consumer behaviour in the first few weeks of 4Q21.
  • 3Q21 LFL sales growth (yoy): Supermarkets -6.4% (vs Morgans -3.0%), Liquor +2.1% (vs Morgans +9.5%), Express +6.3% (vs Morgans +3.0%).
  • COVID-19 costs were at the low end of previous guidance (i.e. up to A$10m per month) but remain dependent on the extent of further snap lockdowns.
  • We decrease FY21F/FY22F/FY23F EBIT by 2%/2%/2%.
  • Our target price falls (login to view) and we retain our Add rating.

3Q21 sales trading update was below our expectations

Supermarkets LFL sales fell 6.4% (vs Morgans -3.0%) during the quarter as the business cycled the elevated sales from COVID-19 in the pcp as well as the Fresh Stikeez collectable program. Online remains popular with sales jumping 49% and now represents 5.5% of total Supermarkets sales (up from 5.3% in 2Q21).

COL continues to focus on growing Own Brand as a point of differentiation with penetration now at 31.6% (vs 30% in the pcp) with management continuing to target 40% penetration over time.

Liquor LFL sales increased 2.1% (vs Morgans +9.5%) driven by strong online sales and Liquorland, while Express (c-store) LFL sales rose 6.3% (vs Morgans +3.0%) due to growth in core categories such as food-to-go, drinks and confectionery.

Consumer behaviour starting to normalise

COL said that Supermarkets sales (adjusted for ANZAC Day timing) for the first four weeks of 4Q21 were up ~4%. In addition, the shift towards local shopping that disproportionately benefitted Woolworths and the independent operators in 1H21 looks to be unwinding with COL seeing consumer behaviour starting to normalise.

Management said they were seeing improved transaction growth, a recovery in impulse categories, Sunday returning to be the busiest day of the week, and customers returning to shopping centres and CBD stores.

While still early days, we think this is encouraging given the market share loss that COL experienced from the local shopping trend in 1H21. There is therefore potential for COL’s market share to improve over subsequent quarters if market conditions continue to normalise.

Maintain Add rating

Following decreases to earnings forecasts our equally-blended (DCF, SOTP, PE) target price falls (login to view). With a 12-month forecast TSR of 21%, we maintain our Add rating.

We continue to see COL as a well-managed business with defensive characteristics. In addition, the strength of the balance sheet (1H21 net cash A$38m exleases) will allow ongoing investment for growth while delivering a consistent dividend stream.

With the stock currently trading on 20.5x FY22F PE (11% premium to the ASX200 vs an historical premium of 22%) and 4.0% yield, we think the valuation remains attractive, particularly if COL’s store network continues to benefit from the unwinding of the local shopping trend. The next key catalyst for the stock will be the strategy day on 9 June.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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