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Coles (ASX:COL) share price on watch following half year update

Coles share price

The Coles Group Ltd (ASX: COL) share price will be one to watch on Wednesday.

This follows the release of its half year results this morning.

How did Coles perform in the first half?

Coles was a positive performer during the first half of FY 2021 and delivered strong top and bottom line growth.

For the six months ended 31 December, the supermarket giant reported an 8% increase in revenue to $20,569 million. This comprised Supermarket sales of $17,800 million (up 7.3%), Liquor sales of $1,946 million (up 15.1%), and Express sales of $632 million (up 10.5%).

Management advised that this growth was driven by successful channel and trading plan execution and increased demand for in-home consumption associated with COVID-19.

Coles also revealed gross margin benefits associated with strategic sourcing and supply chain initiatives. These offset the impact of lower fuel commission income and increased administration expenses.

This led to the company’s earnings before interest and tax (EBIT) increasing 12.1% to $1,020 million. Management advised that Supermarkets EBIT increased 14.4%, Liquor EBIT jumped 36.8%, and Express EBIT rose 14.3%.

On the bottom line, Coles’ net profit increased 14.5% over the prior corresponding period to $560 million.

Also coming in strong was the company’s cash flow. Net cash flow before financing activities increased by $365 million to $1,229 million and its cash realisation ratio came in at 120%.

In light of its positive performance, the Coles board elected to increase its fully franked interim dividend by 10% to 33 cents per share.

How does this compare to expectations?

The company appears to have outperformed the market’s expectations during the half, which could bode well for the Coles share price today.

According to a note out of Goldman Sachs, it was expecting group sales of $20,585.9 million and underlying net profit after tax to $540.4 million.

The broker was, however, forecasting an interim dividend of 34 cents per share. So Coles fell a touch short on that.

Management commentary

Coles’ CEO, Steven Cain, was pleased with the half and the progress the company is making with its refreshed strategy.

He said: “We have now delivered the first 18 months of our refreshed strategy whilst ensuring that we support our team members, customers, suppliers and community partners through a volatile and unpredictable COVID-19 year.”

“In the half we have made significant progress in our Own Brand product development, online operations and supply chain automation. Whilst COVID-19 will continue to present challenges it will also continue to present opportunities for change. With a strong balance sheet and team, Coles is well placed to continue delivering on our vision of becoming the most trusted retailer in Australia and grow long-term shareholder value,” he added.

Outlook

Coles provided a very cautious outlook statement, which could potentially weigh on the Coles share price today. It notes that it is about to cycle very strong sales growth from a year earlier.

Management explained: “Depending on COVID-19, vaccine roll out and efficacy, and other factors, sales in the supermarket sector may moderate significantly or even decline in the second half of FY21 and into FY22. Coles will be cycling elevated sales from COVID-19 in Supermarkets late in the third quarter, for the remainder of the second half, and most of FY22.”

The company also provided an update on the performance of its businesses since the end of the half.

It advised that Supermarkets comparable sales growth has continued to moderate and in the first six weeks of the third quarter was 3.3%.

As for Liquor, its sales remained elevated for the first six weeks of the third quarter with comparable sales growth of 12.5%. Management notes that the business is currently cycling the impact of the bushfires in the prior corresponding period.

What else?

Another thing that could potentially weigh on the Coles share price today was its gross operating capital expenditure guidance. Management advised that it has increased its guidance to approximately $1.1 billion from $1 billion. Though, this is for a good reason.

It explained that the additional funds will be used to invest in opportunities that have arisen out of COVID-19 including Coles Local acceleration, ecommerce, and operational efficiencies in stores such as the customer packing benches.

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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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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