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Coles share price on watch after strong FY 2020 result

Coles share price

The Coles Group Ltd (ASX: COL) share price will be in focus on Tuesday after the supermarket giant released its eagerly anticipated full year results.

How did Coles perform in FY 2020?

For the 12 months ended 30 June, Coles reported sales revenue growth of 6.9% to $37.4 billion. This was driven by growth across all segments and particularly strong comparable store sales growth across the Supermarkets business. The fourth quarter represented the business’ 51st consecutive quarter of comparable store sales growth.

During the year Coles achieved Smarter Selling cost savings in excess of $250 million. Though, these savings were offset by a one-off increase in investment in COVID-19 related expenses.

In respect to earnings, Coles delivered earnings before interest and tax (EBIT) of $1,387 million and a net profit after tax of $951 million. This represents a 4.7% and 7.1% increase, respectively, over the prior corresponding period.

As a comparison, a recent note out of Goldman Sachs reveals that it was forecasting total sales of $37.5 billion and EBIT of $1,392.4 million. This means Coles’ result was broadly in line with expectations.

In light of its strong performance, a fully franked final dividend of 27.5 cents per share was declared. This was an increase of 14.6% on the prior corresponding period and lifts its full year dividend to 57.5 cents.

What were the drivers of its result?

Over the period the key Supermarkets business posted a 6.8% increase in revenue to $32,993 million and a 10.7% increase in EBIT to $1,310 million. This was driven largely by increased demand during the third and fourth quarters during lockdowns and the closure of restaurants and cafes.

The Liquor segment had a strong year for sales but delivered flat profits. Sales increased 8% over the 12 months to $3,308 million, but EBIT remained flat at $120 million.

It was a similar story for its Express stores, which reported a 5.6% increase in sales to $1,107 million but a loss of $16 million. The latter was down from a $50 million profit in FY 2019.

Management commentary.

Coles Group CEO, Steven Cain “In June 2019, Coles set out a refreshed strategy to transform our business and lay the foundations to succeed in our second century. Since that time, we have been presented with a number of unforeseen challenges including drought, devastating bushfires, and of course the ongoing COVID-19 global pandemic.”

“This has provided the greatest test of our lifetime and we are experiencing things we never thought we would see in a supermarket, or for that matter Australia. Coles for its part has become a designated “essential service”, playing an important support role during these crises, and it will also play an important role as the nation recovers and returns to growth,” he added.

FY 2021 outlook.

Management notes that it is operating in a highly uncertain environment, but believes the company is in a strong position to take advantage of opportunities as they arise.

Especially after starting the new financial year in a positive fashion. It explained: “In the first six weeks of the first quarter of FY21, Supermarkets comparable sales remain broadly in-line with the levels achieved in the second half. There is significant variation between states and between stores locations within states as a result of the continuing impact of COVID-19 restrictions around Australia.”

Online sales have also been growing strongly. Following a significant increase in capacity in the second half, they are up 60% in the first six weeks of FY 2021. This growth is being driven largely by consumers in Victoria.

As for margins, they have remained consistent with what the company achieved in FY 2020 despite incurring “significant incremental COVID-19 costs in the early part of FY21 in relation to additional safety.”

Liquor sales have remained elevated and Express fuel volumes are broadly in line with the June exit rate.

Finally, having made a strong start to the Smarter Selling program in FY 2020, Coles continues to target its $1 billion cost-out goal between FY 2020 and FY 2023. In FY 2021, the company will continue to focus on realising cost-out opportunities. Though, the timing will be dictated, in part, by COVID-19.

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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. 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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