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Coles share price: what’s the outlook as Q3 sales surge 12.9%?

We examine some of the key metrics revealed as part of Coles third quarter trading update.

Coles share price Source: Bloomberg

Coles share price: Q3 trading update at a glance

Coles (COL) today reported what many would have already gleamed from their weekly grocery shopping trips, namely: a strong uptick in sales during the third quarter, driven in large part by Covid-19 induced panic buying.

Overall, this saw the iconic Australian supermarket, liquor and petrol chain deliver $9,226 million in third quarter sales, representing a 12.9% increase on the prior corresponding period.

In response to this release, investors bid the stock ~3% lower during the first 30-minutes of trade – to $15.74 per share.

Supermarket demand drives sales higher

On a granular level, during the third quarter Coles saw its Supermarkets division deliver revenue of $8,230 million, representing a significant 13.8% increase on the prior corresponding period.

Comparable sales growth increased 13.1% for the quarter, compared to just 2.4% in Q3 FY19.

As a result of this, the supermarket chain noted that it ‘experienced very strong transaction and basket size growth [during Q3], although the trends were also positive in the earlier part of the quarter.'

However, though the Covid-19 pandemic may have increased demand for many of the supermarket’s core products, it also created a number of new costs, as heightened cleaning and security measures were taken ‘to ensure our stores are a safe place to work and shop for our team members and customers.'

Something to take the margins off

Like Supermarkets, Coles Liquor delivered strong growth on a comparable sales basis. Specifically, Liquor recorded Q3 sales revenue of $740 million, representing a 6.2% increase on the prior corresponding period. Comparable sales growth for the quarter rose an impressive 7.2%, compared to 3.7% in Q3 FY19.

As with Supermarkets, Coles Liquor witnessed a set of increased costs as they relate to cleaning and security functions; as well as margin compression as shoppers leaned towards ‘bulk and value-oriented products.'

Management noted that while it expected to witness elevated Liquor sales as long as restrictions on bars, pubs, clubs and other licensed venues remain in place, it also expects increased costs and margin pressure to persist.

The outlook

Though Coles saw sales increase strongly during the quarter, management flagged that 'Supermarkets comparable sales growth had broadly trended back toward the levels seen in the early part of the third quarter (pre COVID-19).’

Moreover, and as we touched on briefly above, Coles expects its costs to continue to rise in Q4 FY20, driven by ‘higher renumeration costs’, ‘investments in additional cleaning, security and queuing systems’, increased donations and ‘additional team member discounts.’

As a result of all this, Coles said that it now anticipates its FY20 gross operating capital expenditure (CapEx) to come in at between $750 million to $850 million. For reference, in FY19 Coles reported net capex of $770 million, on an accrued basis.

How to trade Coles – long and short

What do you make of today’s Q3 release: are you bullish or bearish on the outlook for Coles? Whatever your view, you can use CFDs to trade the likes of Coles and Woolworths – LONG or SHORT through IG’s world-class trading platform now.

For example, to buy (long) or sell (short) Coles, follow these easy steps:

  • Create an IG Trading Account or log in to your existing account
  • Enter ‘Coles’ or ‘COL’ in the search bar and select it
  • Choose your position size
  • Click on ‘buy’ or ‘sell’ in the deal ticket
  • Confirm the trade

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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