Coles (ASX:COL) share price on watch after COVID costs hit earnings

Coles has released its half year results…

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Key points

  • Coles has released its half year results
  • The supermarket giant managed to deliver modest sales growth despite cycling elevated sales a year earlier
  • However, COVID costs have weighed on its earnings, leading to a profit decline

The Coles Group Ltd (ASX: COL) share price will be on watch this morning.

This follows the release of the supermarket giant's half year results.

Coles share price on watch after earnings decline

  • Revenue up 1% to $20,785 million
  • Earnings before interest and tax (EBIT) down 4.4% to $975 million
  • Profit after tax down 2% to $549 million
  • Fully franked interim dividend flat at 33 cents per share

What happened during the first half?

For the six months ended 31 December, Coles reported a 1% increase in revenue to $20,785 million. Management advised that this reflects elevated sales as a result of lockdowns across New South Wales, the Australian Capital Territory and Victoria, as well as a strong Christmas trade period in the Supermarkets and Liquor segments.

It is also worth highlighting that this sales growth was delivered despite Coles cycling significantly elevated COVID-19 related sales in the prior corresponding period.

Things weren't quite as positive for its earnings. Coles reported a 4.4% decline in EBIT to $975 million for the half. This was caused by higher COVID-19 disruption costs, related travel restrictions on Express' earnings, and transformation project costs.

In respect to COVID-19 costs, Coles estimates that a total of $150 million of COVID costs were incurred during the period. This is up from $105 million in the prior corresponding period.

In addition, approximately $20 million of implementation operating costs attributable to the Witron and Ocado transformation projects were incurred. Though, Smarter Selling benefits in excess of $100 million were delivered during the period.

Overall, while this EBIT result fell a touch short of Morgans' estimate of $988 million, importantly, it was ahead of the Visible Alpha analyst consensus estimate of $965 million. Analysts at MST Marquee described the result as "solid" and "expect small upgrades to earnings" estimates.

Segment performance

In respect to its segments, the Supermarkets segment reported a 1.1% increase in sales to $18,016 million and a 0.8% reduction in EBIT to $896 million.

Whereas the Liquor segment reported a 2.7% lift in sales to $1,999 million and a 4.8% reduction in EBIT to $99 million, and the Express segment posted an 8.5% decline in sales to $578 million and a sizeable 62.5% reduction in EBIT to $12 million.

The latter was impacted by lower fuel volumes due to restrictions on movements during COVID lockdowns.

Outlook

No guidance has been given for the second half but management has provided an update on current trading conditions.

It said: "As Omicron spread through the community in the early part of January, Supermarkets sales were elevated before moderating later in the month. There has been significant variation in sales performance between states, store locations and on a week-to-week basis as a result of COVID-19 and floods in South Australia which have had an impact on sales, particularly in Western Australia. Coles will continue to focus on providing trusted value for customers, including through Exclusive to Coles products, despite increasing cost pressures."

"While the current operating environment remains uncertain, COVID-19 costs of approximately $30 million were incurred in January, primarily due to the large number of COVID-19 related isolations, which have now moderated in February," it added.

Motley Fool contributor James Mickleboro 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 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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