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Earnings preview: What to expect from the Coles FY 2020 result

The Coles Group Ltd (ASX: COL) share price will be in focus later this month when it releases its highly anticipated full year results.

The supermarket giant and rival Woolworths Group Ltd (ASX: WOW) are two of only a handful of companies on the S&P/ASX 200 Index (ASX: XJO) that have been benefiting from the pandemic.

Ahead of the release of its full year results on 18 August, I thought I would see what analysts are expecting from the company.

What is expected from Coles in FY 2020?

According to a note out of Goldman Sachs, its analysts expect Coles to deliver stronger than expected sales and profit growth in FY 2020.

The broker has forecast total sales of $37.5 billion, which will be a 7.1% year on year increase and 1.1% ahead of the market consensus.

Also growing at a solid rate will be its earnings before interest and tax (EBIT). Goldman is expecting Coles to report EBIT of $1392.4 million. This represents a 5.1% year on year increase. And on a post-AASB16 basis, Goldman expects EBIT to come in at $1,759.1 million. This is 0.8% higher than the consensus estimate.

Finally, its analysts are forecasting FY 2020 underlying net profit after tax to be $928.2 million and operating cash flow of $2,824.6 million.:

Food segment.

Goldman Sachs expects the key Food segment to deliver comparable store sales growth of 6.2% in FY 2020, which implies comparable store sales growth of 10.7% for the second half.

This will ultimately lead to Food sales of $33.2 billion for the year.

And thanks to a 10-basis point increase in its margins, Food EBIT is expected to be up 10.3% to $1,304.7 million.

Liquor segment.

The broker also expects its Liquor segment to deliver strong comparable store sales growth. It is forecasting comp growth of 4.4%, taking its total sales 6.3% higher for the year to $3,254.7 million.

However, unlike the Food segment, Goldman is forecasting weaker margins for the Liquor segment. It expects margin decline of 40 basis points, leading to segment EBIT of A$114.5 million. This will be a 4.6% decline year on year.

Coles Express.

The Coles Express segment is expected to act as a drag on its FY 2020 result.

Although the broker expects just a small 0.3% year on year sales decline to $1,045.1 million, it is expecting the segment to post a loss. This compares to its segment EBIT of $50 million in FY 2019.

Taken off conviction buy list.

In light of the strong performance by the Coles share price this year, the broker has removed it from its conviction buy list on valuation grounds.

Goldman explained: “While our thesis remains intact on COL, we remove the stock from our Conviction List in view of the relative limited upside. Since being added to the Conviction list on the 3rd of March 2020, the COL share price is up +25% vs. the ASX 200 being -6.2% (outperformance of 31.2%) and also outperforming supermarket peer WOW by 20% over the period.”

“We maintain the Buy rating on COL on the basis of the reliable ongoing growth and strong balance sheet story,” it concluded. I would agree with this view.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. 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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