Is the Coles Group Limited (ASX: COL) share price a buy?
Other than the terrible drop in fuel volumes at Coles Express, I've been impressed by most of the news I've heard out of Coles since it listed. Coles has taken action to create a new deal with Viva Energy Group Ltd (ASX: VEA) to revive its fuel volumes.
The Coles split from Wesfarmers Ltd (ASX: WES) was a bit of a surprise, but since then it has announced a number of initiatives to hopefully grow future profit and profit margins.
Simply trundling along with the current business model wouldn't have been enough over the long-term for Coles. Aldi is expanding in Western Australia and continues to open stores in Victoria, New South Wales and Queensland. Costco also has store expansion plans. Amazon continues to grow its food offering and Kaufland soon plans to open in some ex-Masters sites. Growing competition is likely to lead to declining profit margins.
The management of Coles has a plan.
Coles has announced two automated ambient distribution centres, one in Queensland and one in New South Wales at a cost of $950 million over six years. To help support these automated distribution centres, Coles is partnering with global online grocery leader Ocado, which will provide technology for an automated single pick fulfilment technology and home delivery solution. These could be the key to boost productivity, delivery times and profit margins.
Each of the warehouses are expected to be operational by FY23 with sales capacity of between $500 million and $750 million.
Coles has also sold the economic rights to its hotels business for $200 million whilst planning for the growth of the on-site liquor stores in Queensland with its joint venture partner, Australian Venue Co. That's a good way to unlock the value of assets that Coles is not a specialist in.
The final thing that Coles is testing is an Uber Eats trial for shoppers to be able to order cooked chickens, or a whole range of other convenience food, which will be picked by Coles team members and delivered by Uber Eats Drivers.
Foolish takeaway
Coles is currently trading at 18x FY20's estimated earnings with a CommSec-projected FY20 grossed-up dividend yield of 6.5%.
I really like all the different things that Coles are trying, but revenue & profit growth could be very limited over the next couple of years. Whilst Coles could be a good source of defensive blue chip dividends for your portfolio, I think if you're going to invest in shares you may as well go for a bit more growth.
