The Coles Group Ltd (ASX: COL) share price has surged close to 20% in the past 2 months and is currently trading near record highs. So, what is fuelling the company's share price and is now the time to invest in Coles shares?
Second wave fears fuelling demand
With Melbourne entering a 6-week lockdown period and fears of a second wave of coronavirus cases growing across the country, supermarkets like Coles could see a renewed surge in demand.
Earlier this month, the company was forced to re-impose purchase restrictions in Victoria as panic-buyers raided supermarkets. Coles has since lifted purchase restrictions after reassuring customers that border closures will not disrupt food and grocery supplies.
How has Coles performed?
In late April, Coles released its 3rd quarter sales update for FY20, which reflected the unprecedented demand seen during the coronavirus pandemic. Coles reported a 12.9% surge in revenue of $9.2 billion for the quarter, whilst also highlighting a 12.4% increase in comparable sales growth.
According to the company, with more Australians confined to living and working from home, household consumption has surged. As a result, Coles saw a significant increase in demand for general groceries, meat, health, and home products.
However, with the surge in demand Coles has also seen an increase in costs. The company has recruited around 12,000 casual team members in order to deal with the surging demand, whilst also spending more money on security and cleaning services.
The outlook for Coles
As more customers continue to work from home, post-pandemic, Coles expects consumer behaviour and habits to change as well. The company expects consumers in the future to increase the amount they purchase whilst also utilising online shopping for convenience.
Coles saw 14% growth in online sales revenue for the 3rd quarter, despite its home delivery and 'Click&Collect' services being temporarily suspended in March. In order to accommodate the change in consumer behaviour, Coles is looking to increase its online capacity in the future.
Should you buy?
I think it is important for investors to understand that a surge in demand doesn't automatically translate into a higher share price. The company still has to invest heavily in e-commerce and other services in order to maintain its growth.
However, despite the increase in costs, I think that Coles is well positioned for growth in 2020 and beyond. The company has a strong pipeline of investment opportunities that are designed to improve its supply chain efficiency and cash status. Examples of this is include investing $950 million over 6 years into automated distribution centres, and developing partnerships with global online specialists.
All that being said, I think a prudent strategy would be to wait until after the August reporting season before buying shares in Coles.
