Coles Group Limited

Decent Q3 FY19 Sales Performance: Coles Group Limited (ASX: COL) is a full-service supermarket retailer with more over 2,500 retail outlets across the nation. The group comprises Coles supermarkets, Coles online, Coles liquor, Coles Express, flybuys, Coles financial services, and Spirit Hotels.

The company recently published 2019 third quarter sales results where supermarket sales grew by 3.2% in the third quarter of the 2019 financial year, supported by a successful ‘Fresh Stikeez’ promotional campaign which drove high customer engagement.Coles Online grew by 27%, with sales of over $1 billion on a rolling 12-month basis. Liquor comparable sales adjusted for New Year’s Eve (NYE) timing increased by 0.9%, with continued strong growth in Exclusive Liquor Brands in the wine category. The strong growth was observed in Coles Express food-to-go despite the impact of year-on-year fuel volume declines.

In another update, COL entered into an exclusive partnership with Ocado to provide leading online grocery shopping experience (Ocado Smart Platform technology)to make life easier for Australian customers. Key benefits of the partnership include a seamless digital customer experience, greater range, improved product availability and freshness, more regular delivery windows, increased network capacity at a lower cost to serve, a safer working environment for Coles’ team members and more highly skilled technology, engineering and construction jobs in Australia.


Q3 FY19 Sales Metrics (Source: Company Reports)

What To Expect: With the partnership with Ocado, two multi-temperature, highly automated Customer Fulfillment Centres (CFCs), one located in each of Melbourne and Sydney, are expected to be operational by FY23. Each CFC has an estimated sales capacity of between around $500 Mn and $750 Mn per annum.Capital expenditure inclusive of upfront Ocado fees is expected to be around $130 Mn to $150 Mn over the four-year development and construction period. This initiative is expected to double Coles’ current Australia-wide home delivery capacity and is expected to lead an improved profit margin for Coles Online.

Stock Recommendation: Coles Group’s share generated positive YTD return of 7.60%. Its ROE for H1FY19 stands at 13.6% better than the industry median of 1.6%, which implies the company is able to generate better returns to its equity holders than its peer group. On the valuation front, its EV/Sales for TTM stands at 0.5x lower than the industry median (Consumer Non-Cyclicals) of 2.0x, indicating the undervalued position at the current juncture.

Hence, considering the aforesaid facts and current trading level, we recommend a “Buy” rating on the stock at the current market price of $12.640 per share (down 0.158% on May 6, 2019).
 

Woolworths Group Limited

Q3 FY19 Group’s Sales Grew By 4.2%: Woolworths Group Limited (ASX: WOW) operates in the Australian and New Zealand market. It has around 3,774 stores and employs around 202,000 employees. Its portfolio comprises important brands in Australian Food (1,008 Supermarkets), Endeavour Drinks, New Zealand Food (181 Supermarkets), Big W (183 Stores), Hotels (323 Hotels), and Petrol (534 canopies).

The company recently announced third quarter (Q3 FY19) sales results which increased by 4.2% pcp to ~$14.9 Bn.Australian Food’s sales momentum improved in the third quarter with Easter-adjusted sales growth of 4.7% benefitting from lower deflation and more settled weather. Its Endeavour Drinks’ Easter-adjusted sales increased by 6.4% with positive comparable growth from BWS and Dan Murphy’s assisted by the timing of New Year’s Eve and weather. New Zealand Food Easter-adjusted sales saw a growth of 2.9% with online growth remaining a highlight.

BIG W’s Easter-adjusted sales increased by 5.6% driven by Everyday, Leisure and Home.There was improved sales growth from Hotels which was driven by Bars and Food with Easter-adjusted growth of 2.7%. The group’s online sales grew by 35.1%. The group returned proceeds worth $1.7 Bn from Woolworths Petrol sale to EG Group to the company shareholders.


Q3 FY19 Sales Metrics (Source: Company Reports)

What To Expect:The company made certain developments in Q3 FY19 to achieve and deliver sustainable growth to its partners, customers and shareholders. It includes an increase in the price of its two and three litre branded milk to $1.10 per litre nationally in February with all funds raised going back to Australian dairy farmers, totalling $10 million.

During the quarter, seven BWS stores were opened and one was closed taking the total fleet size to 1,338. No new Dan Murphy’s were opened during the quarter with 227 stores at the end of the period.Improved in-store processes were rolled out to all stores (New Zealand Food) during the quarter, supporting a simpler team experience and faster order preparation. However, no new stores were opened during the quarter with a current fleet size of 180 Countdown stores.

During the quarter, one BIG W was opened, and one store was closed with 183 stores at the end of the quarter.BIG W is expected to report a loss before interest and tax of $80-$100 million in FY19.

Stock Recommendation: Woolworths Group’s share generated positive YTD return of 9.67% and trading at close to 52-week higher level of $32.780. Its gross margin for H1FY19 stands at 29.1% better than the industry median of 28.7%, which implies the company is in a better position to address its operating expenses than its peer group. Its ROE for H1FY19 stands at 8.6% better than the industry median of 1.6%, which implies that the company generates better value to its equity holders than its peer group.

Hence, considering the aforesaid facts and current trading level, we recommend a “Hold” rating on the stock at the current market price of $32.510 per share (down 1.005% on May 6, 2019).

Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.