Why the Coles share price is down, down!

The Coles Group Ltd (ASX: COL) share price is trading 0.48% lower at $11.50 at lunchtime on Wednesday, a far cry from the high of $13.37 in November 2018.

Following their demerger from Wesfarmers Ltd (ASX: WES) and relisting on the ASX, the Coles Group share price has failed to gain any real traction thus far. Australia’s second largest food and liquor retailer reported half-year results to investors last Tuesday which was greeted with a lukewarm reception, seeing shares drop nearly 3%. The company highlighted its 45th consecutive quarter of same-store food sales growth, with growth of 2.7% in sales revenue to $20.86 billion.

Little Shoppers

The company’s convenience branch ‘Coles Express’ weakened the result by posting earnings of $51 million, a 39% fall. The convenience arm of the company presents a hurdle as fuel prices at Coles Express were found to be higher than the industry average. The challenging retail environment and lower margins were also reflected in an EBIT down 5.8% to $732 million.

In addition, Woolworths Group Ltd  (ASX: WOW) announcing that they will end $1 per litre milk pricing also had negative repercussions on the share price. The Coles Group estimates that earnings for the second half of the year will remain the same.

Playing Defence

In light of the challenging conditions, Coles looks to restructure its convenience and fuel division, signing a new deal with Viva Energy Group Ltd (ASX: VEA). The new alliance could help increase more traffic though convenience stores and lower fuel prices.

No interim dividend was declared by the company, however, a dividend will be paid out in March of 2019. Coles is aiming for a dividend payout of 85% earnings from November 2018 to June 2019, which will be payable as of September 2019. In a challenging retail environment, Coles looks to lay the foundations for long term growth.

Foolish Takeaway

In my opinion, Coles presents a possible opportunity for investors who are looking to balance their portfolio with a classic defensive stock.  Management is looking to reset and refresh the profile of the company by investing in e-commerce, distribution and improving consumer experiences in existing stores and eventually returning the company to profit growth.

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Motley Fool contributor Nikhil Gangaram 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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