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Coles Group Ltd – HY20 Profit Result In Line With Expectations

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

Coles Group Ltd (ASX: COL) is a large Australian retailer, providing customers with everyday products including fresh food, groceries, household goods, liquor, fuel and financial services via its store network and online platforms. The Coles supermarkets segment accounts for most of the group's sales and earnings. Coles is the second-largest Australian grocery retailer behind Woolworths (ASX: WOW), with a market share of around 29% of the grocery market compared Woolworths market share of around 37%.

Coles Group was demerged from Wesfarmers Ltd in November 2019 and has a market capitalisation of $22.6 billion.

COLES

 

What are the key features of HY20 results?

  • Sales revenue (excluding Fuel sales and Hotels) for HY20 is A$18,846 million, up 3.3% compared with the corresponding period.
  • Earnings before interest and tax (EBIT) for HY20 is A$725 million, up 0.4% compared with the corresponding period.
  • Net profit after tax (NPAT) for HY20 is A$489 million, up 1.7% compared with the corresponding period.
  • Earnings per share for HY20 is A37.3 cents, up 1.7% compared with the corresponding period.
  • Interim dividend of 30 cents per share (fully franked), in line with demerger guidance.

 

What are the key drivers of this result?

Revenue growth is reflected by the following factors:

  • Supermarkets sales revenue totalled A$16.6 billion for HY20, an increase of 3.3% on the prior corresponding period. For the second quarter, Supermarkets sales revenue increased by 4.8%. Sales growth was driven by both increased basket size and transaction growth.
  • Liquor sales revenue was A$1.7 billion for the half, an increase of 3.3% on the prior corresponding period. For the second quarter, Liquor sales revenue increased by 3.1% due to improved performance in Liquorland and strong online sales growth of 28%. Customers responded to clearance activity to support the implementation of tailored range change.
  • Convenience store (c-store) sales revenue was A$572 million for HY20, a 4.6% increase on the prior corresponding period. Fuel volumes increased by 3.3% during the half

Supermarkets EBIT of A$637 million (up 5.7% on the corresponding period) benefited from incremental costs incurred in the first half of the prior corresponding period which were not repeated in the first half of FY20. The growth in Supermarkets was largely offset by a fall in the other businesses. EBIT for the Liquor and Coles Express businesses is A$88 million in the HY20 compared with A$120 million in the previous period. This fall in earnings is mainly due to a compression of margins.

 

What is the outlook for Coles Group?

Management did not provide specific earnings guidance for FY20. However, management noted that:

In the early part of the third quarter, comparable Supermarkets sales have remained broadly consistent with the levels achieved in the second quarter. Further, the incremental costs associated with the removal of plastic bags and increased flybuys promotions which were a benefit to Supermarkets EBIT growth in the first half of FY20 will not occur in the second half of FY20. However, Supermarkets EBIT growth in the second half of FY20 will benefit from a Smarter Selling provision of $19 million which impacted Supermarkets EBIT in the second half of FY19 which is not expected to reoccur.

Management also noted that for the Liquor business, it is expected that earnings will remain under pressure in the second half as a result of the tailored range reviews and clearance activity which commenced in the first half. The bushfires have also had an impact on volumes. A review of operations is being undertaken and an update will be provided at the full year results announcement.

The key issue for investors is how the Coles Group HY20 report compares with Woolworths HY20 report which is scheduled to be released on Wednesday 26 February 2020. Over the longer term, the outlook for the Coles Group will be largely driven by its competitive position relative Woolworths competitive position in the grocery market.

 

What is the market reaction to Coles Group’s HY20 results?

The market reaction to Coles Group’s HY20 report is neutral. Coles Group share price is down 0.2% in line with the small fall in the ASX200. This reflects that the HY20 result is in-line with market expectations. Coles Group is currently trading at A$16.85 (Wednesday 18 February 2020). Coles Group trades at a forward P/E ratio in the low twenties and has an annual dividend yield of around 3.5%.


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)

(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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