The Coles Group Ltd (ASX: COL) share price continues to slump with shares in the supermarket giant tumbling for a second day.
The COL share price fell 4.8% to its lowest level this year of $11.50 after Macquarie Group Ltd (ASX: MQG) downgraded the stock after its disappointing first half result yesterday.
This takes Coles Group's losses to nearly 9% although the Woolworths Group Ltd (ASX: WOW) share price isn't faring too much better after it too posted a letdown of a result this morning.
There had been hopes that both supermarkets would outperform the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index this year thanks to easing price competition in the sector, food price inflation and their defensive business models which look appealing in this uncertain economic environment.
Run out of puff
It seems the bulls, including myself, may have gotten ahead of ourselves and Macquarie's decision to cut Coles to "neutral" from "outperform" is exacerbating the sell-off.
The broker said Coles' first half result, its first since spinning out of Wesfarmers Ltd (ASX: WES), was below expectations and profitability may not improve in the short-term.
Coles announced it would begin a "strategic refresh" program in June to turn its earnings around but that probably means rebasing the business, which typically involves a period of higher costs.
"Whilst the group would not commit to potential medium-term growth targets, we are concerned that this strategy may require near-term opex and indeed more capital investment," said Macquarie.
"COL indicated it is highly cash generative and has a strong balance sheet to permit investment. Whilst we agree, the risk is likely to the downside in the near-term absent a significant pickup in LFL [like-for-like] sales growth across the platform."
The LFL performance of Coles is a big concern for Macquarie. The broker noted that LFL growth is probably running around 1.5% since the start of 2019 and that's below cost growth for the group.
Foolish takeaway
The gloss has certainly come off the sector and with Coles trading on a FY20 price-earnings multiple of around 19 times, the stock is looking a little overpriced given its nearer-term outlook and earnings risks.
Woolworths is trading at a bigger premium (as it should) but it's results also show that is may not deserve to be on such lofty multiples.
But the bigger question is whether the two wounded giants may be forced to be more aggressive in fighting for market share.
If that's the case, we could see the return of the supermarket war – something that shareholders would be wary of.
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