Coles profit climbs 7.1pc as food sales surge

Sue Mitchell

Aug 18, 2020

AFR

Coles’ supermarket sales have risen about 10 per cent in the first six weeks of 2021, underpinned by 60 per cent online growth, but chief executive Steven Cain has warned that COVID-19 related costs also remain elevated.

Coles is aiming to cut costs by about $250 million this year – similar to the cost savings in 2020 – to offset higher COVID-related expenses such as cleaning, doorkeepers and security and maximise operating leverage from topline sales growth.

“At 10 per cent [sales growth] we can cover our costs and make ordinary levels of EBIT margin,” Mr Cain told The Australian Financial Review. “Clearly if sales go down a lot of the costs, certainly in Victoria, are going to be there for while.”

Coles’ net profit from continuing operations rose 7.1 per cent to $951 million in 2020 – the first profit growth in four years – as strong food sales during the pandemic offset COVID-19 costs and losses in the convenience business as fuel sales fell.

Earnings before interest and tax from Coles supermarkets rose 10.7 per cent (on a retail basis) to $1.31 billion in the 12 months ending June and by 16 per cent in the June-half as sales rose 6.8 per cent to $32.9 billion.

Food gross margins rose 30 basis points and cost of doing business fell 16 basis points, boosting EBIT margins by 14 basis points to 4 per cent.

Australia’s second-largest food retailer enjoyed record sales growth in the March quarter – with same-store supermarket sales soaring 13.1 per cent (up 30 per cent in the month of March) – as shoppers stocked up on toilet paper, pantry staples and liquor.

The strong growth continued in the June quarter, with same-store supermarket sales up 7.1 per cent – beating forecasts of around 6.4 per cent – as consumers adjusted to cooking more meals at home and as inflation rose to 3.3 per cent. Woolworths, which reports full year results next week, is expected to achieve same-store food sales growth of 7.4 per cent.

The solid fourth quarter took Coles’ same-store sales growth for the year to 5.9 per cent and lifted sales per square metre by 5 per cent, with bigger baskets offsetting lower transaction growth.

Mr Cain said same-store food sales in the first six weeks of 2021 had grown in line with levels in the June-half, around 10 per cent.

But COVID-19 related costs also remained elevated and supermarket margins were consistent with the 4 per cent EBIT margin in 2020. Coles would need to deliver strong sales growth to offset higher costs, he said.

The supermarkets result included a $16 million charge after a review of salaried team members found Coles had underpaid staff by about $15 million over six years.

Group earnings before interest and tax rose 4.7 per cent to $1.38 billion on a retail basis and excluding the impact of changes to lease accounting standards. It was the first earnings growth in four years and followed a 8.3 per cent decline in 2019.

Test of our lifetime

Mr Cain said 2020 was the “greatest test of our lifetime” as the retailer was disrupted first by the summer bushfires, followed by floods and then the coronavirus pandemic.

“It goes without saying this has been a year like no other – some might say unprecedented and the word resilience is also in the air,” Mr Cain said.

“The global pandemic has provided the greatest test of our lifetime and we’re seeing things we never thought we’d see in a supermarket, or for that matter in Australia,” he said.

Consumer habits were changing in supermarkets and liquor stores, he said, pointing to the fact that meat was now Coles’ fastest growing category as shoppers did more scratch cooking at home.

“There has, and will be, much to learn from COVID-19. We are determined to emerge as a better, stronger business and team. Our purpose of sustainably feeding all Australians to help them lead healthier, happier lives is now more relevant than ever.”

“The pace of change in the business is accelerating, particularly with our digital assets and capabilities, and we are demonstrating true agility on a week to week basis.”

Coles Online sales rose 18.1 per cent over the year and by 30 per cent in May and June and would have been even stronger if not for capacity constraints during the first national lockdown in April and May.

Mr Cain said online sales soared more than 60 per cent in July and August, driven by stage four lockdown restrictions in Victoria, while capacity had doubled.

Mr Cain was originally aiming to restore profit growth by 2021. His five year growth plan includes cutting costs by $1 billion by 2023, tailoring Coles’ range and boosting online capabilities to cater to time-poor shoppers demanding more convenience.

About $250 million in costs under the Smarter Selling program were taken out in 2020 – – $100 million more than expected – offsetting $170 million in COVID-19 related costs such as cleaning, security and labour in the June quarter.

Coles plans to invest $1 billion in gross capex this year, up from $833 million in 2020, refurbishing 65 supermarkets, opening between 15 to 20 new supermarkets and pressing ahead with the construction of two automated warehouses in conjunction with Witron, two automated online fulfilment centres with Ocado as well as further investment in IT and digital. Coles expects to incur $75 million in incremental operating costs in 2022 for the Witron and Ocado projects.

Liquor flat, convenience in the red

Liquor earnings were flat at $120 million on a retail basis, even though sales rose 8 per cent to $3.3 billion. June quarter sales surged 20 per cent and online sales soared 40 per cent, boosted by demand for packaged liquor while hotels, clubs and bars were closed or restricted.

Higher liquor sales volumes were offset by margin pressure and ongoing clearance activity as Coles tweaked its range. The result also included a $4 million charge as a

result of the wage underpayments.

The convenience business lost $16 million on retail basis, compared with a profit of $50 million previously. Fuel volumes fell another 2.3 per cent and convenience store margins declined as customers shifted towards top-up and non-food categories.

Under Coles’ new fuel alliance with Viva Energy the retailer now reports commission income rather than fuel sales. Coles needs to achieve weekly fuel sales of about 70 million litres – compared with an average 46 million litres a week in the June quarter – to break even under the new agreement.

Liquor sales remained elevated in the first six weeks of 2021, Mr cain said, but fuel sales were flat.

The retail and statutory results were messy as they included several one-off costs, some of which were associated with Coles’ demerger from Wesfarmers in 2018.

Statutory net profit fell 9.3 per cent to $978 million, but this included five months of earnings from former stablemates Kmart Target and Officeworks.

Coles shares slipped 1.3 per cent to $18.68 after earlier touching a record $19.04. The shares have risen 27 per cent this year, from $14.84 in January to $18.93 on Tuesday, valuing the group at $25.2 billion.

After demerging Coles in November 2018, Wesfarmers sold a 5.2 per cent stake in the retailer in March for $1.06 billion or $15.39 a share and a 4.9 per cent stake in February for $1.05 billion or $16.08 a share.

The retailer increased its final dividend to 27.5¢ a share, payable September 29, up from 24¢ a share in 2019, taking the full year payout to 57.5¢, representing a payout ratio of 81 per cent.