Coles Group Ltd (ASX: COL) reported its third-quarter market update this morning, and it was an interesting read, to say the least!
For the period between January and March 2020, the supermarket giant reported that its sales revenue for the quarter was up a substantial 12.9% compared with the same period in 2019.
Coles' supermarket division recorded a 13.8% sales increase, whilst Coles' liquor division also saw a 7.2% bump.
So why are Coles shares falling today?
You would expect Coles to receive some encouragement from the share market over these results – being nothing short of a bumper season for the grocery giant. Instead, the Coles share price is down a hefty 5% at the time of writing to $15.41 a share.
What's going on?
Well, in my opinion, the devils are in the details here. In conjunction with these sales numbers, Coles also informed the market of some other factors at play that are far less profit-friendly.
Firstly, increased costs. Coles told investors it expects to see further rising costs in the fourth quarter as a result of the coronavirus and associated social distancing measures. It has already installed significant protective equipment like plexiglass screens across most of its supermarkets as well as reconfiguring its checkouts and making some aisles 'one-way'. None of these measures would have come cheap (although I think they were the right thing to do).
Secondly, Coles also advised that it's beginning to see sales volumes return to a normal level this month. This shouldn't come as a surprise – Australians' appetites didn't increase in March, just our pantry sizes and a sudden penchant for long-life groceries and alcohol. But still, it points to a much less exciting fourth quarter for Coles – a quarter that looks likely to have normalised sales volumes with increases costs. No wonder investors have lost a little mojo over Coles.
Are Coles shares a buy today?
Even after today's share price drop, I would describe Coles as being 'fairly valued' rather than a screaming buy. This company still has a price-to-earnings ratio of 17.38 and a dividend yield of 2.72%, which doesn't really get my heart pounding.
I think Coles has merit as a solid, defensive, dividend-producing share for an income-focused portfolio. But I don't think today's moves justify a 'go-for-broke' kind of investment. As such, I'm still on the sidelines on this one and I think there are many better opportunities out there.
