Australia | Apr 30 2021
Is the worst of the pandemic behind Coles now, signalled by several features of shopping behaviour that are starting to normalise?
-May and June likely to be challenging
-Concerns over a price war appear overdone
-Is valuation becoming attractive?
By Eva Brocklehurst
The outlook may be improving for Coles ((COL)) as shoppers return to malls and CBD stores, although supermarket like-for-like sales fell -6.4% in the March quarter as elevated sales from the start of the pandemic were cycled.
Online sales rose 49% and now represent 5.5% of supermarket sales and, as Macquarie points out, the company experienced transaction growth for the first time in a year, amid increased expenditure on baked goods, drinks and confectionery.
In April, supermarket sales rose 4% and the company is notably growing its own brand is a point of differentiation, with penetration now at 31.6%.
The shift towards localised shopping that disproportionately benefited Woolworths ((WOW)) and the independent supermarkets in the first half appears to be unwinding. Management has observed Coles is experiencing improved transaction growth and a recovery in impulse purchases.
Sunday is returning as the busiest day of the week and customers are going back to shopping centres and CBD stores. Morgans finds this encouraging, given the share loss that Coles experienced from the trend to shop close to home in the first half.
Credit Suisse upgrades to Outperform, on the back of a normalisation of consumer shopping. While the supermarket result was below forecasts and there was little change in trend sales growth, the broker takes heart in management's commentary that behaviour is returning to normal.
Citi believes like-for-like sales are likely to remain volatile as the pandemic is cycled but upgrades to Buy as well, to reflect more typical earnings multiples and sales growth. The broker suggests the underperformance of Coles supermarkets relative to the broader market troughed in the March quarter and a strong April is likely to be enough to drive a flat fourth quarter result.
Macquarie posits May and June will be more challenging for comparables as this was the period in 2020 when lockdowns were at their height and abnormal at-home consumption trends commenced.
Fixed costs have fallen from -$30m at the height of the pandemic to between -$3-4m per month currently and Citi calculates -$110m in cost reductions in the second half. This should, in turn, provide a much-needed buffer to a forecast -2.8% decline in second half sales.
Goldman Sachs was disappointed with the comparable growth but believes the update has a positive aspect in terms of the trends and longer-term supply chain efficiency. An implied two-year compound growth rate of 2.9% is expected to continue into the end of the fourth quarter.
Are concerns regarding market share and a price war overdone? The two main drivers of underperformance, in Morgan Stanley's view, included the under-representation of Coles in neighbourhood/local stores, which has been exacerbated by weaker online growth, and expectations of a price war stemming from the re-launched ' down down' campaign.