The analysts at investment bank Goldman Sachs have been running the numbers on leading businesses from the S&P/ ASX200 (ASX: XJO) after the interim profit reporting season and remain bullish on a number of retail investors' favourite businesses.
Many 'mum and dad' investors will own shares in Coles Group Ltd (ASX: COL) after its spin off by investment conglomerate Wesfarmers Ltd (ASX: WES) and the good news is that Goldmans has a positive view on Coles despite its disappointing performance since hitting the ASX boards.
According to the analysts its core groceries or Coles supermarkets business delivered on three important metrics for the six-month period ending December 31 2018: "Increased own brand penetration (+55bps), online sales growth (+30%) and improved inflation (+0.5%) were key positives for the food segment."
However, Goldmans did flag that margin pressure remains an issue in the "food segment" as both it and Woolworths Limited (ASX: WOW) have been forced to cut their world-leading margins over the last few years thanks in part to rising overseas competition from the likes of Aldi and Costco.
Investors would do well to consider which way margins are likely to head over the medium term given they are still at arguably elevated levels, compared to previously stratospheric ones.
The analysts also point out that Coles is still around 20% smaller than Woolworths in terms of its store footprint and as such has the opportunity to grow via new stores and market share as well as increased same-store sales or potentially margins.
Goldmans also highlighted how Coles Liquorland business performed well with "margin expansion" and strong sales growth.
Both Coles and Woolworths under Dan Murphy's totally dominate Australia's alcohol retail markets to give them pricing power with suppliers (who have no choice but to use them) and consumers stifled for choice themselves.
As we can see then the core strength of Coles Group is its dominant market position alongside Woolworths that gives both these businesses some pricing power and a robust long-term outlook in my opinion.
Goldmans has a $13.10 12-month share price target on Coles Group, which is close to 10% below today's price of $12.21. As such I expect Goldmans is on the money with its analysis.
