Is the Coles (ASX:COL) share price a buy?

The Coles share price has been rising, might it be an opportunity?

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Could the Coles Group Ltd (ASX: COL) share price be worth looking at considering it has been rising in recent months?

Over the last five months, Coles shares have risen by around 15%. It has been recovering since the decline in February 2021.

The stronger performance in recent weeks coincides with the lockdowns that have been happening around the country in the last month or two, particularly in NSW.

What has Coles been working on in recent times?

One of the key elements of Coles’ plan over the next few years is its Witron automated distribution centres (DCs). Management believe this will create a powerful advantage.

The new DCs will provide safer working environments with improved service at a lower cost. It will result in reduced lead time for better availability, with both sites providing a ‘full ambient range’ in each state. The new DCs will double the volume on half the footprint. It will have approximately two thirds of the operating costs of a standard site. Coles says the integration of the Witron automated DCs and Ocado’s customer fulfilment centres will create a powerful advantage.

The Coles share price could also be helped by the other supply chain improvements which is leading to a major transformation and cost saving program. Its initiatives have led to a 35% increase in pallets moved, increased product life (by reducing store order lead time by a total of 20 million days) and training for drivers moved to an online platform.

One area of future focus is embedding a fully integrated transport management system to improve efficiency and service.

The business has also been improving its supplier relationships and procurement process which is delivering an improvement in perceptions from suppliers whilst also improving its cost of goods sold (COGS).

Trading update

In the third quarter, the business saw that its total sales were down 5.1% year on year with the prior period experiencing that huge panic buying during the initial global disruption from COVID-19.

However, compared to the third quarter of FY19, total sales were up 7.2%.

But compared to both 2019 and 2020, liquor and express sales had increased.

At the time, Coles said that consumer behaviour had started to normalise, including a return to shopping centres and CBD stores. There were also increased shopping trips and improved transaction growth. But, on a national level, that was before these latest lockdowns. So investors will have to see what Coles says about the fourth quarter and the start of FY22.

But the supermarket business did say in the quarterly update that e-commerce sales to consumers were up 57% and its smarter selling was on track to deliver cost savings of more than $250 million in FY21.

Is the Coles share price worth looking at?

Morgan Stanley currently rates Coles shares as a buy, with a price target of $19.

The broker realises that the supermarket business is investing a lot into different initiatives at the moment, which will reduce profit, but thinks the valuation is/was attractive compared to Woolworths Group Ltd (ASX: WOW).

One of the things that Morgan Stanley notes is the prospect of a large dividend. In FY22, Coles is expected to pay a grossed-up dividend of 4.8%.

Should you invest $1,000 in Coles right now?

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended 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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