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Results in: Is the Coles share price a buy?

The Coles Group Ltd (ASX: COL) share price will be on watch on Tuesday following the release of its first set of results since the demerger from Wesfarmers Ltd (ASX: WES).

Here’s a quick summary of how Coles performed during the six months to December 31 compared to the prior corresponding period:

  • Sales revenue increased 2.6% to $20,867 million.
  • Supermarket revenue lifted 3.6% to $16,195 million.
  • Liquor revenue up 0.6% to $1,731 million.
  • Express revenue down 1.8% to $2,941 million.
  • EBIT (pre-significant items) down 5.8% to $733 million.
  • Operating cash flow of $1,460 million.
  • Earnings per share (pre-significant items) of 36 cents per share.

What were the drivers of this result?

The standout performer for Coles during the half was its key Supermarket segment. Sales increased 3.6% thanks to strong comparable sales growth of 3% driven by the Little Shop promotion and improved availability.

Another driver of growth in the segment was its online sales. They have grown 30% over the year to reach $1 billion on a rolling 12-month basis. Click and collect sales grew 80% on the prior corresponding period.

Segment EBIT rose 0.4% on the prior corresponding period to $602 million. EBIT growth was slower than revenue growth due to cost pressures relating to the new store EBA, its transition from single use plastic bags, and higher energy costs.

Another positive performer was the company’s Liquor segment. Although sales only grew 0.6% on the prior corresponding period, segment EBIT grew an impressive 7%. The latter was driven by exclusive brand growth and productivity efficiencies.

The main drag on the company’s results during the half was the Express segment. Sales fell 1.8% and segment EBIT tumbled 39.3% to $51 million. This was caused by lower fuel volumes and unfavourable weather.

Outlook.

Management advised that overall sales momentum in the third quarter of FY 2019 remains broadly in line with the second quarter. Though, cost headwinds from the new store EBA, energy prices, and drought impacts on input costs are expected to continue.

Coles will not be paying an interim dividend due to the timing of its demerger but expects to pay a final dividend for the year ending June 30, reflecting seven months of earnings post demerger.

In the future the company has reaffirmed its target dividend payout ratio of 80% to 90% of earnings.

Should you invest?

Apart from the disappointing performance of its Express segment, which was pre-announced, I thought this was a solid result from Coles.

Based on its current valuation and positive long-term outlook, I think it would be a great option for investors and would choose it ahead of rival Woolworths Group Ltd (ASX: WOW).

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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