The Coles share price beat the ASX 200 by over 10% in June

Coles shares were a safe haven during the share market plunge in June.

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Key points

  • Inflation could provide a boost to Coles earnings 
  • The Coles share price outperformed the ASX 200 by double-digits last month 
  • Sales are rising, but UBS suggests Coles could lose market share 

The Coles Group Ltd (ASX: COL) share price was a solid performer during June 2022.

While a rise of 1.6% may not sound like much of a gain, it delivered substantial outperformance compared to the S&P/ASX 200 Index (ASX: XJO) which dropped around 9%. That means the company beat the return of the ASX 200 by more than 10% in just one month.

There are three main areas of the Coles business: supermarkets, liquor and service stations. Some of those liquor brands include Liquorland, First Choice Liquor and Vintage Cellars.

It’s not as though checkouts at Coles’ locations are booming like during the COVID-19 panic buying in 2020, but there could be a key reason for the support of the Coles share price.

What happened in June?

There weren’t any market-sensitive announcements from the company during June 2022. The last update from the business was its FY22 third quarter sales announcement.

However, investors are getting plenty of commentary about the current economic situation.

Inflation is rising in Australia and is very high in places like the UK and the US.

As reported by various media including the ABC, March inflation data showed that food prices rose by 4.3% year on year. The biggest increases related to fresh vegetables and meat, up 6.7% and 6.2% respectively.

Coles is obviously one of the biggest retailers of food in the country and acts like a middleman. If Coles’ profit margins stay the same, but food prices jump 5%, then in theory Coles’ profit would rise by 5% as well.

With the latest floods in New South Wales, there are warnings that there could be more supply issues for food and could lead to even higher prices.

The broker UBS points out that higher food prices could increase demand for supermarket own brand products.

Latest sales update

For the third quarter of FY22, being the 12 weeks to 27 March 2022, Coles saw total sales rise by 3.9% to $9.3 billion, including a 4.2% growth for Coles supermarkets to $8.2 billion.

The company said that supplier input cost inflation was expected to continue in the FY22 fourth quarter and into FY23. It also said that COVID-19 costs are expected to continue to moderate further as public health requirements are/were eased.

While inflation is rising, the broker UBS is currently ‘neutral’ on Coles with a price target of just $18.75. It’s possible that Coles could lose market share to Aldi and Woolworths Group Ltd (ASX: WOW).

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 has positions in 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 Scott Phillips.

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