Panic buying sales boost pumps up Coles earnings

Coles has increased its final payout on the back of surging sales, as underlying earnings rose 6pc.

Shoppers line up outside a Coles supermarket to comply with social distancing guidelines. Picture: AAP

Coles chief executive Steven Cain is bracing for a slow recovery in the Australian economy as the COVID-19 pandemic shakes household budgets and job security, with the supermarket planning for a Christmas trading period heavily tilted to providing bargains and value for shoppers.

At a time when Coles is absorbing extra costs triggered by the response to the coronavirus, from sneeze guards and extra staff to masks and protective equipment totalling around $100 million a quarter, Mr Cain said he was aware that more shoppers than ever before would be on tight budgets towards December and be looking for value.

“We are seeing a flight to value which is making sure that people who are on a budget - which there will be more of them - they can now still do shopping within their budgets at Coles,’’ Mr Cain told The Australian as Coles unveiled a 31.8 per cent drop in full-year statutory net profit to $978 million as the supermarket giant accounted for the earnings it lost when it was demerged from Wesfarmers in late 2018.

A better reflection of the health of the Coles business that booked a robust 6.9 per cent lift in supermarket and liquor sales to $37.4 billion for fiscal 2020 was its improved underlying earnings, which were better by 5.7 per cent to $951m and slightly ahead of market consensus.

Driving those sales and earnings gains was a spike in activity as the coronavirus pandemic hit and consumers were stripping groceries from the shelf, pushing fourth quarter same store sales to leap by 7.1 per cent - beating many analyst expectations - to record Coles’ 51st consecutive quarter of supermarket sales growth.

But in the wash up of the extended COVID-19 pandemic Mr Cain warned he expected a greater proportion of his shoppers to face Christmas with tighter budgets, with the level of stress across households tempered by government support.

“The extent to which we will get an economic recovery is really down to how COVID is managed over the next year, isn‘t it, and I think that is the bit that requires what is the medium term strategy for managing COVID in Australia and then creating a much better planning environment for business.

“Those (stimulus, subsidy) payments are gradually coming down, we don’t know if they will be extended beyond the current time frame, if you are planning on what everyone is being told then you sort of get to the conclusion that it’s going to get tougher before it gets easier.”

For Coles shareholders at least there would be more coin in their pockets, as it announced a near 15 per cent lift in its final dividend on the back of surging sales at its supermarkets.

At a time when the banks are reducing their dividends, or cancelling them completely, a new vanguard of industrial and mining companies are taking their place to offer a higher dividend stream with Coles joining other retailers such as JB Hi-Fi and Kogan.com to generate better dividend returns.

Coles declared a final dividend of 27.5 cents per share, up 14.6 per cent on last year’s final dividend. The final dividend will be paid on September 29.

The supermarket group said total revenue for the company fell 1.8 per cent to $37.78 billion. A one third slide in full-year headline profit reflects the demerger in late 2018 which removed Kmart, Target and Officeworks from the Coles accounts with 2019 still including five months of profits from the Wesfarmers businesses. The subsequent hotels joint venture and restructuring of fuel wholesale arrangement also meant Coles no longer receives revenue from either of those two businesses. Its sales were also hurt by the demerger and fuel deal.

Coles said its retail sales excluding these one-off events rose 6.9 per cent to $37.4bn, while there was strong like for like sales in the stores, as well as online, but Mr Cain would not say how long this trajectory would continue.

“I think it will depend what else people can do with their money whether restaurants are opened, whether people can go on holiday or not, but I think you will see more of the same as what we saw as last year which is continued product development to innovate and bring people affordable luxuries.”

He said home brand, or supermarket brand, groceries would also continue to play a strong role within Coles, especially as household budgets were stretched.

“The main thing for us is that home brand offering and making sure as well as innovating that we are providing everyday low prices at the entry price points and we have done a lot of work on that last year and continue to do that.”

In fiscal 2020 Coles achieved more than $10bn in sales for its own brand groceries, up 10 per cent, and now contributing 31.2 per cent of supermarket sales in the fourth quarter.

It comes as Coles swallowed $170m of extra costs in the fourth quarter linked to dealing with COVID-19, on top of $30m in the third quarter, with a current rate of $100m per quarter of additional costs in the stores and distribution centres.

The chains’ liquor outlets, comprising Liquorland, First Choice and Vintage Cellars, reported an 8 per cent rise in sales to $3.308bn with earnings flat at $120m.

Looking ahead to trading in the first few weeks of fiscal 2021, Coles reported like for like sales growth for the first six weeks of the quarter as in-line with the second half of around 10 per cent gains.

Shares in Coles down 1.2 per cent. at $18.71.