Coles upgrade defies retail woes

Coles’ earnings upgrade tops analysts’ forecasts.

ELI GREENBLAT
FEBRUARY 6, 2020
The Australian

Supermarket giant Coles has unveiled a surprise earnings and sales upgrade, defying fragile consumer confidence and a subdued economy to lift its guidance for the first half thanks to bumper Christmas trading.

The earnings upgrade, which forecasts December half earnings of $710 million to $730m, tops analyst consensus forecasts of $658m.

Coles has also lifted its guidance for second quarter like-for-like sales to 3.6 per cent, against initial expectations of a sales lift of just 2.8 per cent.

However it hasn’t gone all Coles’ way, with heavy competition causing a retreat in first-half earnings for its retail liquor arm.

The unexpected lift in Coles’ grocery performance over Christmas will place pressure on rival Woolworths.

It also highlights a level of immunity in the grocery sector to the poor trading experienced by other retailers over the last year.

The Coles trading update comes ahead of its half-year results later in February.

In its 2020 first quarter sales results on October 29, 2019, Coles reported that in the early part of the second quarter, supermarkets’ comparable sales growth had trended towards the level achieved in the fourth quarter of the 2019 financial year.

But Coles’ strong Christmas has given a bump to sales and earnings.

“The success of the Christmas campaign exceeded expectations, with supermarkets delivering comparable sales growth of 3.6 per cent in the second quarter and 2 per cent for the first half,” it said.

Comparable sales growth in liquor and express were 2.1 per cent and 5.1 per cent respectively for the second quarter, and 1.5 per cent and 2.9 per cent respectively for the first half.

Coles said its provisional first half EBIT was expected to be between $710m and $730m.

The first half provisional EBIT result will be impacted by non-operating items, namely a $15 million self-insurance release of the workers compensation provision, largely as a result of improved safety performance; and earnings from property operations of $33 million, including net gains from property disposals which represent the vast majority of the expected fiscal 2020 property earnings.

Coles said its EBIT growth in the first half of 2020 benefited from incremental costs incurred in the first half of 2019 relating to the removal of plastic bags and increased flybuys promotions, which were not repeated in the first half.

Despite a satisfactory outcome on sales, liquor EBIT in the first half of 2020 was down on the prior corresponding period as a result of margin pressure and was impacted by clearance and promotional activity following the commencement of strategic range reviews.