Coles upgrade defies retail woes

Supermarket giant Coles has unveiled a surprise earnings and sales upgrade, thanks to bumper Christmas trading.

Coles’ earnings upgrade tops analysts’ forecasts.

Supermarket giant Coles has thrown down the gauntlet to arch rival Woolworths ahead of both retailers reporting their December-half results this month, unveiling a surprise earnings and sales upgrade that has defied fragile consumer confidence and a subdued economy.

Coles chief executive Steven Cain looks to have nailed his second Christmas at the helm of the supermarket group, with bumper sales over December pushing the retailer beyond market forecasts.

The earnings upgrade, which forecasts December-half earnings of $710m to $730m, exceeds analyst consensus forecasts of $658m. Coles has also lifted its guidance for second quarter like-for-like sales growth to 3.6 per cent, against initial expectations of just 2.8 per cent.

However, it hasn’t gone all Coles’ way, with heavy competition causing a retreat in first-half earnings for its retail liquor arm, matching similar recent tightening of trading conditions for Woolworths’ Dan Murphy’s.

The upgrade from Coles sets the scene for a renewed battle with Woolworths, which has outperformed it in same-store sales growth for the last quarter.

Coles shares rose after the improved trading update, climbing almost 2 per cent, but a late sell-off saw the stock close down 2c, or 1 per cent, at $16.63.

In its 2020 first-quarter sales results in October, Coles reported that in the early part of the second quarter, supermarkets’ comparable sales growth had trended towards the level achieved in the fourth quarter of the 2019 financial year.

But Coles’ strong Christmas has given a bump to sales and earnings.

“The success of the Christmas campaign exceeded expectations, with supermarkets delivering comparable sales growth of 3.6 per cent in the second quarter and 2 per cent for the first half,” it said.

Coles chief Steven Cain. Picture: Andrew Henshaw

Comparable sales growth in liquor and express were 2.1 per cent and 5.1 per cent, respectively, for the second quarter, and 1.5 per cent and 2.9 per cent, respectively, for the first half.

Coles said its provisional first-half EBIT was expected to be between $710m and $730m.

The first-half provisional EBIT result will be affected by non-operating items: a $15m self-insurance release of the workers compensation provision, largely as a result of improved safety performance, and earnings from property operations of $33m, including net gains from property disposals which represent the vast majority of the expected fiscal 2020 property earnings.

Coles said its EBIT growth in the first half of 2020 benefited from incremental costs incurred in the first half of 2019 relating to the removal of plastic bags and increased flybuys promotions, which were not repeated in the first half.

Despite a satisfactory outcome on sales, liquor EBIT in the first half of 2020 was down on the prior corresponding period as a result of margin pressure and was affected by clearance and promotional activity following the start of strategic range reviews.

JPMorgan analyst Shaun Cousins said the update reflected the supportive trading environment in food, with Woolworths cost pressures allowing food inflation to occur.