Coles (ASX: COL) has remained on track as a business over the past year, delivering modest revenue growth of 3.1%. The company has recently been spun off from the Wesfarmers group, since management hoped the rest of the business would trade on multiples more reflective of their high margins.
The Coles share price has barely moved since the Wesfarmers demerger (Credit: St Ives Shopping Village)
While Coles is a defensive stock, it has not benefitted from a rally in other defensive names in industries like utilities and infrastructure. This is because grocery retailing is not viewed as a high-quality business to the same extent as companies in other defensive industries. The supermarket chain has little room for growth, given it controls the immense majority of the market along with Woolworths. Further weighing on sentiment is the 8.1% EBIT decline that Coles posted over the past year. The company faces increased competition from new entrants like Aldi, in addition to the potential for disruption from Amazon. In response to the increased competition, Coles entered a partnership with the IT consulting giant Accenture to enable them to improve efficiency through technology and automation. This will enhance the long-term sustainability of their business model.
Another reason why the stock price has been relatively stagnant over the past year is that the business has been tracking in line with expectations. Grocery retailing may not be a great business, but it’s a good business and a stable one at that. People are unable to make significant cuts to expenditure on food in a recession, which insulates Coles from the economic cycle. As such, Coles shares remain in demand with investors looking to hedge downside risk, but fears around the long-term sustainability of Australia’s supermarket duopoly are keeping the company from rallying substantially.
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.