All eyes will be on the Coles Group Ltd (ASX: COL) share price on Tuesday morning following the release of its half year results.
How did Coles perform in the first half?
For the 27 weeks ended January 5, Coles reported sales revenue of $18,846 million and earnings before interest and tax (EBIT) of $725 million. This represents a 3.3% and 0.4% increase, respectively, over the prior corresponding period.
On the bottom line, Coles reported a net profit after tax of $498 million and earnings per share of 37.3 cents. This was a 1.7% increase on the first half of FY 2019.
The Coles board declared its inaugural interim dividend since the Wesfarmers Ltd (ASX: WES) demerger. The supermarket giant will be paying shareholders a 30 cents per share fully franked interim dividend.
What were the drivers of its result?
The key Supermarkets segment was the standout performer during the first half. It delivered a 3.3% increase in sales to $16,583 million and a 5.7% increase in EBIT to $637 million. Management advised that this was driven partly by food inflation, solid online sales growth, increased basket size, and transaction growth. A positive start to the "Winning in our Second Century" strategy also supported its growth.
The Liquor segment posted a 3.3% lift in sales to $1,691 million but a 9.9% decline in EBIT to $67 million. The profit decline was the result of a tailored range change which commenced during the half across the spirits, white and sparkling wine, and craft beer categories. This led to higher levels of clearance and promotional activities which impacted its gross margin negatively.
The Express segment acted as a drag on its EBIT during the half. Although it recorded a 4.6% increase in sales to $572 million, it posted a 92% decline in EBIT to $4 million. However, this was due to the New Alliance Agreement announced in March 2019.
The Other segment reported $17 million of EBIT for the first half. This segment includes corporate costs, Coles' 50% share of flybuys' net profit, the net gain or loss generated by Coles' property portfolio, and self-insurance provisions.
Outlook.
Management advised that so far in the third quarter its comparable Supermarket sales have remained broadly consistent with what it achieved in the second quarter. Liquor profits are expected to remain under pressure, though. This is due to the tailored range reviews and clearance activities.
Coles' gross operating capex continues to be on track for $700 million to $900 million in FY 2020. However, the coronavirus outbreak is delaying renewal refrigeration equipment being shipped out of China.
