The Coles Group Ltd (ASX: COL) share price could be on the move today after the supermarket giant released its first quarter update.
What happened in the first quarter?
Coles was an impressive performer during the first quarter and delivered a result ahead of expectations.
For the three months ended 30 September, Coles reported a 10.5% increase in total sales revenue over the prior corresponding period to $9.6 billion.
As I mentioned here earlier this week, Goldman Sachs was estimating that the company would report a 7.7% increase in total first quarter sales to $9,365 million. Based on this, Coles has smashed expectations.
What were the drivers of Coles' strong quarter?
The key driver of the company's growth during the first quarter was its Supermarkets business.
It reported comparable sales growth of 9.7% for the three months and online sales growth of 57%. This led to the Supermarkets business recording a 9.8% increase in sales to $8,464 million.
Management advised that its strong comparable sales growth was driven largely by its Victorian stores which benefited from stage 3 and stage 4 restrictions. It notes that sales growth in other states were on average elevated but tapered off in the latter part of the quarter.
In addition to this, the pattern of bigger basket sizes continued across the country, which is more than offsetting lower transactions.
Management also notes that customers continue to focus on home cooking and hygiene. Key growth categories included baking mixes, herbs and spices and flour, cleaning goods, and dishwashing.
Conversely, categories most negatively impacted by COVID were infant formula, facial tissues, and beauty. It advised that these all experienced double-digit declines, which could be bad news for A2 Milk Company Ltd (ASX: A2M) and Bubs Australia Ltd (ASX: BUB).
Supporting its growth was its Liquor business. It delivered comparable sales growth of 17.8% and online sales growth of 57%. This resulted in first quarter Liquor sales of $852 million, up 17.4% on the prior corresponding period.
Management notes that its liquor sales remained elevated throughout the first quarter across all states despite the relaxation of on-premise consumption of liquor in some states. Customers are continuing to purchase value-oriented larger pack sizes in beer and spirits.
Also delivering strong growth was its Express business. It reported comparable sales growth of 10.2%, leading to first quarter sales growth of 10.3% to $291 million.
Finally, Coles provided investors with an update on its costs. While it has continued to implement industry leading safety measures in stores and distribution centres, these were delivered at a lower cost.
Approximately $65 million of COVID costs were incurred in the first quarter as restrictions also eased outside of Victoria.
Coles' CEO, Steven Cain, commented: "We have made further progress executing our strategy to ensure the long-term growth of Coles, particularly in digital and online. This is despite significant COVID related restrictions in Victoria related to our main Store Support Centre, our distribution centres, our meat suppliers and of course, our customers."
Outlook.
In the first four weeks of the second quarter of FY 2021, Supermarkets comparable sales growth was 6.4% (5.4% excluding Victoria). Online sales growth for the first four weeks of the second quarter was 45%, as demand eased in Victoria.
Liquor comparable sales growth for the first four weeks of the second quarter was 16.9% (15.3% excluding Victoria).
And while there remains uncertainty around COVID with regards to the foreseeable future, Coles sees a number of important trends that will impact its business positively.
These include high levels of awareness of personal hygiene standards, increased levels of at-home activity, online consumption, restricted international travel, and opening state borders.
