Would Coles Group Limited (ASX: COL) make a dependable ASX share to buy right now for a portfolio?
The Coles share price sank after releasing its half-year result for FY21 – it has dropped by around 15% since 16 February 2021.
What was in the report?
It wasn't as though Coles reported a loss for the first 27 weeks of the financial year.
Total sales revenue went up 8.1% to $20.4 million, total earnings before interest and tax (EBIT) rose 12.1% to $1 billion, net profit after tax (NPAT) rose 14.5% to $560 million and earnings per share (EPS) grew 14.5% to 42 cents.
Like most retail businesses, Coles is seeing a large increase of online sales. Coles saw total e-commerce sales go up 48%, whilst sales to household consumers grew 61%. Coles Supermarkets saw EBIT rise by 14.4%.
The liquor division actually had a standout performance, with revenue growing by 15.1% to $1.95 billion and EBIT growing 36.8% to $104 million.
Drilling down into the different metrics for Coles Supermarkets, it saw a 71 basis point increase of the gross profit margin to 25.8%. This improvement came about after strategic sourcing initiatives in its own brand as well as a more efficient supply chain, according to management.
Despite the worsening of the cost of doing business (CODB) percentage by 40 basis points to 20.7%, Coles was able to increase its EBIT margin by 31 basis points to 5.1%. There were approximately $70 million of COVID-19 costs during the period.
Over the half, Coles Supermarkets delivered comparable sales growth of 7.2%. There was inflation of 2.3% over the period, though it was only 0.7% when excluding tobacco and 'fresh'.
A key focus of Coles is expanding its own brand offering. Own brand saw $5.7 billion of sales in the half, an increase of 9.8%. The most successful products were in the convenience and Christmas ranges.
Was the Coles share price hit by the outlook?
Coles warned that depending on COVID-19 and various impacts, sales in the supermarket sector may moderate significantly or even decline in the second half of FY21 and into FY22.
The supermarket business pointed out that it will be cycling against elevated sales from COVID-19 supermarkets late in the third quarter, for the rest of FY21 and most of FY22. Remember, Coles has benefited from pantry stocking, people working and eating at home, and customers shopping online to avoid physically shopping in-store.
However, Coles did say that its stores in larger shopping centres are likely to pick up again as customers return to those places. Increased movement could benefit fuel volumes as COVID-19 restrictions ease.
In the first six weeks of the third quarter, supermarket same store sales growth was 3.3% with online sales growth of 37%. Growth was stronger in liquor with comparable growth of 12.5%.
Is the Coles share price worth buying?
Whilst there aren't that many buy ratings out there for Coles shares right now, the price targets suggest there's quite a lot of potential growth.
For example, Citi doesn't rate Coles as a buy – but its share price target is $19 which suggests it could rise around 20% over the next year. The broker was turned off by the higher costs and expectations of lower sales growth, or even a decline of sales.
Broker Morgan Stanley has a share price target for Coles of just over $20. The broker expects that growth is going to slow from here and it's not expecting Coles to do as well as it previously thought over the next couple of years.
According to Morgan Stanley, Coles shares are trading at 22x FY21's estimated earnings.
