Coles: Shoppers Are Migrating Online and Seeking Cheaper Options

We maintain our fair value estimate of AUD 14.50 per share on no-moat Coles COL. With the revenue tailwind of food price inflation abating, the task of driving top-line sales growth in the Australian supermarket industry is now more reliant on food sales volumes.

We expect Australian wage inflation of 6% to outstrip food sales growth of around 5%, weighing on operating margins of supermarket operators, including Coles, in fiscal 2024. Strong growth in less-profitable online sales could be a further headwind to near-term supermarket margins. In the first quarter, Coles grew online food sales by 25%, compared with Woolworths increasing Australian online food sales by 18%.

Our fiscal 2024 underlying earnings estimate is unchanged at AUD 0.79 per share. First-quarter group sales growth of 4% is tracking in line with our full-year forecast—adjusted for an additional trading week in fiscal 2024. We expect food price inflation to further moderate and sales volumes to remain soft in the near term as cost-of-living pressures continue to bite.

In the first quarter, Coles supermarkets slightly underperformed Woolworths’ Australian chain, with supermarket sales growth of 5% and 6%, respectively. Food price inflation continued to moderate in the first quarter. Like Woolworths, Coles dropped shelf prices for fruit, vegetables, and meat. However, on average, food prices are still rising. Inflation at Coles of 3% was ahead of the 2% reported by Woolworths.

In liquor, customers are trading down, buying mainstream beer brands instead of craft beers, and switching to sparkling wine from champagne. After adjusting for the timing of a key sporting event, Coles’ liquor sales increased by 3% in the first quarter, slightly below our unchanged full-year estimate of 4% growth in liquor sales.