Coles Group Limited (ASX: COL) has reported its half year result to investors this morning, sending the share price down 2.7%.
After 10 years being owned by Wesfarmers, Coles Group was split from the broader Wesfarmers conglomerate (which owns Bunnings Warehouse) in November 2018. However, the Coles name has operated in Australia for 100 years. Today Coles is one of the largest retailers in the country, serving 21 million customers per week across its supermarkets, Coles Express, Online, Vintage Choice and others.
Why the Coles share price is down
After shifting its reporting calendar to align with a ‘retail calendar’ result, Coles said that its sales revenue increased by 2.6% to $20.87 billion.
However, Coles total EBIT fell by 5.8% to $733 million (click here to learn what EBIT means). Statutory profit from ordinary activities after tax declined by 29.4% to $381 million.
The important supermarket segment increased revenue by 3.6% to $16.2 billion and EBIT grew by 0.4% to $602 million. Comparable sales growth came in at 3% with price inflation of 0.5%.
The liquor segment grew sales by 0.6% to $1.73 billion, with EBIT increasing by 7% to $85 million. The profit margin improvement was driven by productivity efficiencies and exclusive brand expansion.
A big detractor from the result was Coles Express. Sales revenue may have only declined by 1.8% to $2.94 billion, but EBIT declined by 39.3% to $51 million. This was largely due to a 15.8% decrease in fuel volume sales, apparently the Coles Express fuel price was typically higher than the market average, the lower revenue amplified the fixed costs such as rent – which is why EBIT fell a lot harder.
To combat this decline, Coles has made a new deal with Viva Energy Group Ltd (ASX: VEA), although the EBIT margin will be lower in the future compared to the past with the new model.
One-off demerger costs are also being recognised in the FY19 result, which affects earnings negatively.
Coles has not declared a dividend for the half year to 30 December 2018, however it will pay a dividend in March 2019 which reflects its earnings up to 27 November 2018.
The Coles Board is targeting a dividend payout ratio of 80% to 90% of earnings from 28 November 2018 to 30 June 2019, to be payable in September 2019.
Is Coles a buy?
Coles said that its sales growth is likely to be same in the second half of the year, it has made its first payments for the automated distribution centres and now it expects its net capital expenditure for FY19 to be between $700 million to $800 million.
With its supermarket business, Coles generates a lot of cash and is quite defensive compared to a lot of other ASX shares. But, in my opinion a business is only worth owning shares of if the profit is growing, like the ones in the free report below.
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