At the beginning of the COVID-19 pandemic, the news and social media was plastered with footage of shoppers panic buying goods. As a result, supermarket giants like Coles Group Ltd (ASX: COL) are expected to see bumper sales growth for the March quarter.
In addition to the short-term gain, the COVID-19 pandemic could have a longer lasting impact on consumer behaviour. As a result supermarkets like Coles and Woolworths Group Ltd (ASX: WOW) could become major beneficiaries by tapping into the market share of cafes and restaurants.
Here's why I think Coles is the best positioned supermarket and why I'm watching the company's share price.
Streamlined operations
Following its demerger from Wesfarmers Ltd (ASX: WES) in November last year, Coles has refocused its food and liquor operations resulting in improved sales momentum. Earlier this year, Coles reported 49 consecutive quarters of comparable sales growth.
In addition to stronger operating margins and earnings, the company's management was also able to identify $1 billion in cost saving that could be achieved by FY23. Coles also has a great ability to generate strong cashflows, boasting a 100% operating cash conversion rate.
Dividend potential and investment opportunities
In addition to a strong operating cash flow, Coles also demerged from Wesfarmers with relatively low levels of debt. As a result, the supermarket giant has the ability to pay an attractive and sustainable dividend to shareholders. Coles currently has a dividend policy to pay out upwards of 90% of its earnings to shareholders.
Coles also has a strong pipeline of investment opportunities that are designed to improve the company's supply chain efficiency and cash status. Examples of this is include investing $950 million over 6 years into automated distribution centres and developing partnerships with global online specialists.
Should you buy?
Recently, equity analysts from Credit Suisse released a note in which they retained their outperform rating on Coles and lifted its share price target to $18.68. Analysts cited that the supermarket giant is poised to take advantage of changing consumer behaviour in the short and medium term.
In my opinion, the panic buying and consumer hoarding should give the Coles share price some short-term momentum. However, I also think that the supermarket giant offers investors with attractive returns for the long term.
Strong sales growth, an attractive dividend yield and investment in streamlining it operations and efficiency could make the supermarket giant a keystone stock to build a portfolio around.
