Coles’ first quarter sales hit an air pocket with growth of 1.3%, an aberration compared to what should transpire for the rest of FY23f. Inflation remains a net positive for COL through to next year and the concern on falling volumes is misleading the market. Independents are taking market share in liquor.
1Q23 group sales +1.3%, supermarket comparable sales +2.1%. COL’s first quarter supermarket comparable sales growth was a slowdown from the 3.7% reported in 4Q22. With inflation running at 7.1% in the quarter, there was therefore a meaningful fall in volumes inferred in the result. This is explained by the elevated base line from the same quarter in 2020 and 2021. The comparable sales metric should jump back up to around 5.9% in 2Q23f given a much lower baseline.
Volume growth peaked during the COVID lockdowns so the current fall in volume needs to be examined against this. Weaker online sales also contributed to the volume story. COL online sales fell 11.5% in 1Q23, and penetration of total sales slipped back to 7.6%. For reference, comparable sales at the physical stores increased 3.1% in the quarter.
The distortion of sales trends caused by the pandemic suggests that a three-year view would provide a more instructive picture. On that basis, comparable volume growth over a three-year period has been about 1% pa while price growth has been around 3% pa. If inflation remains around 7% for the next two quarters, we expect further volume declines.
Input costs tend to be the catalyst for price inflation and the trend is easing. Higher energy and labour costs will hang around in CY23, but we expect inflation to otherwise decline to 2-4% by the end of 2023.
Liquor sales -4.0% in 1Q23 (comparable). As with supermarkets, liquor sales were heightened through the pandemic. On a three-year basis, liquor sales grew 4.6% pa. We anticipate the liquor industry experienced a sales decline of -1% to -2% in the quarter implying that COL lost market share. The same outcome applied to Endeavour Group, so the market share gains were made by independent liquor groups.
Coles Express sold to Viva Energy. During the quarter, COL sold the fuel and convenience business to Viva Energy, further concentrating COL to the supermarket and retail liquor industries. This will remove $816 million of lease liabilities from COL’s balance sheet.
Investment View
The lower share price is not justified, in our view and presents an opportunity to buy the stock. Supermarket volumes remain relatively neutral, and sales growth is being aided by inflation.
Risks To Investment View
Inflation is highly topical at the moment, but it is likely benefitting COL. Most households have plenty of savings but may begin to cut back on volumes if price increases get too sharp.
Recommendation
We have upgraded our recommendation to Buy.
