Coles Group Ltd (ASX: COL) shares are under the microscope by analysts after the supermarket business recently announced its FY24 third-quarter sales.
There are three main segments to the Coles business – supermarkets, liquor and a supply agreement to Viva Energy Group Ltd (ASX: VEA) after the sale of Coles Express.
Let's remind ourselves what the business reported for the third quarter.
Sales recap
Coles reported that in the 12 weeks from 1 January 2024 to 24 March 2024, supermarket sales revenue increased 5.1% to $9.07 billion and liquor sales fell 1.9% to $786 million. Total sales revenue rose by 3.4% to $10.03 billion.
The supermarket business saw inflation excluding tobacco and fresh of 2.9%, while total inflation was 2.2%.
E-commerce sales were particularly strong – with growth of 34.9% for online supermarkets and 4.1% growth for online liquor sales.
The company also reported that in the early part of the fourth quarter, supermarket volumes had remained "positive", underpinned by its "value campaigns and strong execution of trade plans".
It's continuing to see deflation in fresh produce and meat and moderation in inflation across its broader packaged categories. Coles also said it has "made good progress in addressing loss which is expected to continue in the fourth quarter" – the change on the loss rate iss "in line with expectations."
However, in liquor, discretionary spending is "expected to remain subdued". In the early part of the fourth quarter, the sales performance has been "broadly in line with the third quarter".
Is the Coles share price a buy?
After seeing the update, analysts at UBS decided to increase its estimates for earnings per share (EPS) in FY24 and FY25 by 6.2% and 8.7%, respectively because of higher projected earnings before interest and tax (EBIT), thanks to higher sales and lower cost of doing business (CODB). However, that overall profit growth is expected to be moderated by lower liquor EBIT (from lower sales and a lower EBIT margin).
The broker points to a number of tailwinds for the business.
First, theft issues in the 2023 calendar year provide a basis for the gross profit margin to recover/expand in 2024. There are also ongoing promotional management initiatives.
Second, the Witron automated distribution centres provide "cost savings with upside due to further cost savings realised in-store."
Third, UBS pointed out that the 'simplify and save to invest' cost savings are helping the business deliver "improved earnings momentum".
The broker thinks confidence in the execution of Coles' initiatives can lead to the price/earnings (P/E) ratio multiple gap to Woolworths Group Ltd (ASX: WOW) narrowing further.
UBS calls Coles shares a buy, with a price target of $18.25. That implies the Coles share price could rise by 11% over the next year.
The broker suggests Coles could generate 86 cents of EPS in FY25 and pay an annual dividend per share of 75 cents. That would put the current Coles share price at 19x FY25's estimated earnings with a potential grossed-up dividend yield of 6.5%.
