The Coles Group Ltd (ASX: COL) share price has dropped 6% since investors had a good look at the company's FY22 results released yesterday.
For investors who didn't catch it, the business reported ongoing growth in revenue and profit.
Let's have a quick reminder of how Coles performed in the last financial year.
Coles earnings recap
Coles said its total revenue increased 2% to $39.4 billion. Its net profit after tax (NPAT) went up 4.3% to $1.05 billion and the earnings per share (EPS) increased 4.6% to 78.8 cents.
However, it also revealed that earnings before interest, tax, depreciation, and amortisation (EBITDA) went up 0.2% to $3.44 billion. Earnings before interest and tax (EBIT) fell 0.2%.
Part of the update included the progress made on its 'smarter selling' benefits. It noted it achieved $230 million of benefits in FY22 and it's on track to deliver its four-year program of $1 billion in benefits by FY23.
There was a bit of a difference in performance between the three core divisions.
In terms of year-over-year sales growth, supermarkets saw 2.2% growth to $34.6 billion, liquor saw 2.5% growth to $3.6 billion, and Coles Express saw a sales decline of 5% to $1.1 billion.
However, in EBIT terms, supermarket EBIT rose by 0.8% to $1.71 billion, liquor EBIT fell 1.2% to $163 million, and Coles Express EBIT dropped 37.3% to $42 million.
What do experts make of the results and the Coles share price?
Ratings agency S&P thinks Coles' profit margin will hurt due to rising food costs, labour costs, and supply chain and energy prices combining to cause difficulties, according to reporting by The Australian.
S&P is expecting Coles' adjusted EBITDA to be "broadly flat" in FY23.
S&P analysts Sam Playfair and Craig Parker said:
The company's ability to pass on supplier calls for price increases, and higher food and operating costs, to inflation-hit consumers will determine whether it can maintain stable EBIT margins.
We expect discretionary spending to be spread thin during fiscal 2023 as consumers opt for more affordable items. As a result, we expect the challenge to remain competitive on price will rise.
Cost-conscious consumers will hunt cheaper products; and this competition may cause promotional activity to rise, affecting EBIT margins and free cash flow. Under this scenario, we believe Coles would likely prioritise maintaining market share above profitability.
However, other experts are positive on the business.
For example, the broker Morgans rates Coles as add, with a share price target of $20. It likes that Coles' earnings are pretty defensive, which means it should be able to do well even if the economy goes through some difficulties.
The broker Citi also rates Coles shares a buy, with a price target of $20.10. It noted that Coles has been gaining market share recently.
Don't forget the dividend
Arguably, one of the most underrated aspects of Coles shares is the dividend.
The dividend has been steadily growing since 2020. The FY22 full-year dividend was increased by 3.3% to 63 cents after a 7.1% rise in the final dividend to 30 cents per share.
At the current Coles share price, that translates into a grossed-up dividend yield of 5.1%. That's arguably a solid starting yield, with broker expectations of dividend growth in the coming years.
