Coles Group Ltd (ASX: COL) shares have done well for shareholders in the last year, rising by over 10%. However, the chart below shows it has not been a one-way rise for the company.
There have been a few reasons for that rise, including growing sales, higher profits, and a bigger dividend.
It's not clear what will happen in the next year or two regarding (food) inflation or the US tariff trade war. But there's one thing that could really help Coles.
The fund manager, Contact Asset Management, has outlined a key strategy Coles has pursued in recent times. This strategy is expected to significantly increase the supermarket company's profit growth, which could help Coles shares.
Image source: Getty Images
$6 billion invested in the supply chain
Contact noted that over the past five years, Coles has invested over $6 billion in capital expenditure, primarily focused on modernising its supply chain with the rollout of automated distribution centres (ADCs) and customer fulfillment centres (CFCs).
The fund manager believes this strategic, long-term investment in technology-driven innovation has "significantly improved efficiency, sustainability, and safety" within the distribution network.
This has allowed Coles to achieve a 99% fulfillment rate and expand the product range by 25% compared to a typical Coles store.
Contact said that the e-commerce side of Coles has continued to "demonstrate strong performance, reporting sales growth of 22.6% in the first half of fY25".
How could this help Coles shares?
The broker UBS is projecting that Coles' operating profit (EBIT) margin could climb substantially in the next few financial years, partly thanks to the supply chain improvements.
UBS is predicting Coles could achieve an EBIT margin of 4.8% in FY25, which could then grow to 5.1% in FY26 and 5.4% in FY27.
This improvement in the EBIT margin could help the net profit after tax (NPAT) grow by 30.8% between FY25 and FY27, reaching a bottom line of $1.41 billion.
Profit is a key driver of the Coles share price, so the potential growth of net profit is compelling for the company's outlook. If Coles delivers on that pleasing expected profit growth, it could help the company fund even higher dividend payouts.
