September 19

Coles Group Limited: Navigating Challenges and Opportunities in the Australian Retail Landscape

Coles Group Limited (COL) is an Australian retailer, providing customers with everyday products, including fresh food, groceries, general merchandise, liquor, fuel and financial services through its store network and online platforms.

We slightly increased our fair value estimate on Coles by 3% to $14.50, mostly reflecting the time value of money. Our sales and earnings estimates remain largely unchanged following broadly in-line FY2023 results. We expect soft earnings growth from ongoing operations in the near-term due to weak volume growth, declining shelf price inflation, and labour costs rising ahead of sales growth—together resulting in operating deleverage. So far in FY2024, volume growth has only been modestly positive. And in the June quarter of 2023, shelf price inflation continued to ease, to 5.8% from 6.2% in the March quarter of 2023. Nevertheless, Coles expects tailwinds to support its food and liquor sales in FY2024, including above-average population growth, improved product availability, and a shift to more at-home meal preparation from eating out. The consumer is clearly hurting, especially young families and Coles’ customers aged under 34 years. Shoppers are cutting back on a wide range of discretionary items from hairdressers and beauty services to entertainment and gifts. Hard times are also motivating more shoplifting—a global, industrywide phenomenon. Total loss, which includes theft and waste, is up some 20% on FY2022. Wages are also on the rise. They are playing catch-up with the prior year’s consumer price index increases and Coles’ hourly wages are due to increase by 5.75% in FY2024—plus an annual Victorian payroll tax increase of $20 million.


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