Coles Group Limited (ASX: COL) has just reported quarterly growth in all of its business segments. However, I think they have been some worrying signs lurking beneath the headline results.
After 10 years of being owned by Wesfarmers Ltd
(ASX: WES), 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.
A Lackluster Result?
First-quarter sales revenue across the Coles Group rose by 1.8% to $8.7 billion. However, it was in the supermarket segment where same-store sales rose by just 0.1%. This very low level of growth might be cause for some concern. It was the slowest growth in same-store sales in more than a decade.
The supermarket chain struggled to match the boost they received this time last year from some promotional activity which included giving away miniature plastic toys to customers.
If you ask me, 0.1% growth looks even more disappointing when you compare it to the 2.2% growth in the prior period, and it is a far cry from the 5.1% same-store sales growth achieved in the September quarter last year.
Coles’ supermarket business accounts for nearly 90% of all sales and is, therefore, the key long-term driver of profits and the Coles share price.
The liquor division recorded total sales of $726 million, up 3.5% on the previous corresponding period, whilst Coles Express lifted sales 3.1% to $264 million. The liquor division and Coles Express recorded same-store growth of 0.7% and 0.4%, respectively.
Still Better Than Expected
Despite the trend not appearing great on face value, analysts had actually been expecting a much worse result than what was delivered. Consensus estimates were for a decline in same-store sales growth of between 0.9% and 1.5%.
The company has alleviated some concerns by stating that early in the second-quarter same-store sales growth is trending back towards similar levels to the final quarter of FY19 (2.2%).
The fact that the first-quarter results had beat expectations along with reports of a positive start to the second quarter is likely the key drivers behind the share price opening nearly 1% higher today.
“The refreshed strategy we set out to Win in Our Second Century has helped us to deliver a positive set of results for our first quarter,” CEO Steven Cain said.
“The increased sales momentum we are seeing in the second quarter demonstrates that the changes we are making to inspire customers are already making a difference.”
Coles shares were trading 2.3% higher at $14.90 at the time of writing.
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At the time of publishing, Luke has no financial interest in any companies mentioned.
