Lick the plate

RESULTS ANALYSIS

Need To Know

• 2H23 supermarket EBIT crunched.
• Inflation beginning to ease, but costs still rising.
• COL is cheaper than WOW but lacks a catalyst.

Investment Implications

Result overview:

Supermarket EBIT $1,765m +2.9%, consensus $1,847m

Liquor EBIT $157m, consensus $143m

Gross capex $1.4bn, top end of $1.2-1.4bn guidance

Group net profit $1,098m, consensus $1,130m

Dividend 66cps in line with the market.

FY23 result. COL reported 2H23 comparable store sales growth of 6.7%. The inferred 4Q23 growth is ~6.9% with volume growth improving. But supermarket gross margin fell 32bp in 2H23 after increasing by 43bp in 1H23. Rising theft by organised crime in supermarkets could account for up to half of the weakness, in our view, with increased discounting contributing. COL supermarket EBIT margin fell 61bp in 2H23 although this was mitigated by a $25m staff cost provision and some provisions to more like a 25-30bp fall.

Cost of living pressure is building up sales of in-house brands by +9.6% to $12.4bn in FY23. Total supermarket sales were reported as $36.7bn. Growth in budget product sales increased +12.4% in 2H23 (+7.1% in 1H23).

Liquor sales were flat for the year at $3.6bn with EBIT of $157m down -3.7% on last year. Gross margin increased 91bp while EBIT margin fell 18bp to 4.3% although 2H23 saw an improvement.

Outlook. Capex in FY24 will be $1.2-1.4bn as COL invests in the Kemps Creek ADC (automated distribution centre) and the automated CFCs (customer fulfilment centres). The company will open 15 new supermarkets, close 6 and refresh another 50. Liquor will open 20 new stores, close 6 and renew 100. The second ADC will also open in FY24. The higher capex is dragging up the depreciation and amortisation charge to $1.65bn in FY24, together with other recent investments already opened.

COL said supermarket volumes are modestly positive so far in FY24, and inflation has softened in fresh foods. We estimate this means comparable store sales growth around 5-6%.

Higher wage costs will impact on FY24 based on the Fair Work Commission decision earlier this year.

Given the weak gross margins in 2H23 and rising costs, consensus forecasts may be too high at this point.

COL will invest $1bn across FY24-27 in a Simplify and Save cost-out program designed to offset inflation.

Investment View

Slowing sales as inflation runs out of puff, together with higher wages suggests margins and earnings growth will be hard to procure. We think COL’s liquor growth is below industry providing another challenge.

The delayed Ocado handover of the Victorian CFC will see that facility commence in mid-FY25, a year late. The NSW CFC is still expected to commence at the end of 2H24, also slightly late. The delays are likely to bump the project cost by $70m and the operating expenditure by $50m. Total capex for the program is now $400m with about half of this still to be spent in FY24-25.

COL is trading cheaper than WOW on a FY24 PER around 21x but we cannot see a catalyst to gee the share price up.