Coles Group: Lockdown wasn’t too bad

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Alex Lu
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By Alex Lu
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Date posted:
29 October 2021, 7:30 AM
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  • Coles Group's (ASX:COL) 1Q22 sales update overall was slightly better than we expected.
  • LFL sales growth: Supermarkets +1.4% (vs MorgansF +0.1%); Liquor +1.4% (vs MorgansF -1.6%); and Express (c-store) -9.5% (vs MorgansF +1.2%). 
  • In the first 4 weeks of 2Q22, Supermarkets LFL sales were broadly in line with 1Q22 (ie +1.4%) and up ~8% on a 2-year basis.
  • Changes to earnings forecasts see FY22-24F underlying EBIT and underlying NPAT rise by between 1-2%. 
  • Our target price increases slightly to (login to view) and we maintain our Add rating. We continue to prefer COL over Woolworths (WOW, Hold) in the Supermarket sector.

Supermarkets and Liquor delivered good results

Supermarkets LFL sales increased 1.4% (vs MorgansF +0.1%) driven by ongoing at-home consumption with NSW, ACT and VIC in lockdown during the quarter and strong online growth, while the picnicware campaigns resonated with customers.

This compared to WOW Australian Food LFL sales growth of 2.7%, although we thought the gap to WOW would have been greater due to COL’s greater exposure to shopping centres and relatively smaller neighbourhood store footprint.

Online sales jumped 48% driven by elevated demand during lockdowns and increased capacity in NSW and VIC. Online now represents 9% of Supermarket sales vs 6% in the pcp. In comparison, WOW Australian Food online sales increased 53% with penetration at 11% (vs 8% in the pcp).

Liquor LFL sales increased 1.4% (vs MorgansF -1.6%) despite cycling elevated COVID-driven growth of 17.8% in the pcp. Growth was driven by a strong performance in Liquorland (particularly in NSW and VIC) due to the closure of on-premise venues, while strong online growth of 72% was supported by increased capacity and customer experience enhancements.

While online penetration increased to 4.5% (vs 3.6% in 4Q21), it is still well behind Endeavour Group Retail penetration of 11.5%. Management is looking to improve the online offer through further investment in Click & Collect and On-Demand delivery.

Express was impacted by lockdowns

Express (c-store) LFL sales fell 9.5% (vs MorgansF +1.2%), negatively impacted by lower traffic due to lockdowns in NSW, ACT and VIC as well as cycling strong tobacco sales in the pcp.

Excluding lockdown states, 2-year sales growth was a solid 10% with food-to-go (including coffee) being the key driver.


Management advised that Supermarket LFL sales in the first 4 weeks of 2Q22 were broadly in line with 1Q22 (ie +1.4%) and up ~8% on a 2-year basis.

COVID costs are expected to peak in October and start to moderate in November and December due to recent changes in isolation policies, particularly in NSW and VIC. A lower level of COVID costs is expected to continue into 2H22. 

In Express, COL expects volumes to recover in 2H22 as consumer behaviour normalises and mobility increases.

Lockdowns have caused delays to COL’s construction projects with some capex expected to be pushed into FY23. In FY22, capex is now expected to be between A$1.2-1.4bn (vs up to A$1.4bn previously).

Changes to earnings forecasts and investment view

We make minor changes to earnings forecasts with FY22-24F underlying EBIT and underlying NPAT rising by between 1-2%.

COL is a defensive business with strong market positions and a healthy balance sheet. While Supermarkets and Liquor sales growth is likely to moderate as economies reopen and the risk of lockdowns decrease due to higher vaccination rates, trading on 23x FY22F PE and 3.5% yield we continue to see the stock as offering good value.

We therefore maintain our Add rating with our equally-blended (DCF, SOTP, PE) target price rising marginally to (login to view).

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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.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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