Is the Coles share price a defensive ASX 200 buy right now?

Are supermarket shares worth putting in your investing shopping basket?

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Key points

  • Coles shares have performed well compared to the ASX 200 this year
  • The supermarket business is rated as a buy by multiple brokers
  • However, sales growth could be variable in FY23 as it cycles against lockdowns and inflation in FY22

The Coles Group Ltd (ASX: COL) share price has seen a bit of volatility this year. But, arguably, less than the S&P/ASX 200 Index (ASX: XJO).

In 2022, Coles shares have dropped 7% while the ASX 200 is down by 13%.

The supermarket business may be seen as a defensive ASX 200 share. We all need to eat food, right? During the difficult lockdowns of COVID-19, it was businesses such as Coles that were deemed to be essential and could stay open. Shoppers continued buying and the supermarket business kept generating profit.

FY22 saw Coles report that total sales revenue increased by 2% to $39.4 billion and net profit after tax (NPAT) went up by 4.3%.

Is the Coles share price a defensive ASX 200 buy?

Some investors aren't sure if the business is worth buying yet. For example, writing on The Bull, Arthur Garipoli from Seneca Financial Solutions said:

The supermarket and liquor giant's result in fiscal year 2022 was in line with market expectations. Like most retailers, Coles experienced cost pressures in response to COVID-19. In a higher interest rate environment, Coles can be sufficiently agile to appeal to shoppers by ensuring affordable prices.

Growth of sales and earnings is certainly not guaranteed. Coles pointed out that in FY23, supermarket sales growth will be cycling against COVID-19 lockdowns in the first half of FY22 (for New South Wales, Victoria and the Australian Capital Territory), and price inflation in the second half of FY22.

While it's able to pass on price increases for some products, it is suffering from cost inflation in areas like rent, wages, packaging, raw ingredients and freight.

However, some brokers are positive on the business. Both Citi and Morgans think that the Coles share price can rise by around 20% to $20 over the next year. Those analysts believe that the sale of Coles Express to Viva Energy Group Ltd (ASX: VEA) will allow the business to concentrate on and invest in the supermarket and liquor businesses.

Fuel and convenience sale

Coles will receive $300 million and assign leases, which currently represent a liability of $816 million on Coles' balance sheet, to Viva Energy at completion. This is expected to occur in the second half of FY23, subject to approvals.

Customers will still get existing loyalty benefits, including the 4 cents per litre fuel discount.

The Coles Express-branded network will be rebranded by Viva Energy. The majority of sites will be completed over the next two years.

Coles will continue to partner with Viva Energy in relation to product supply arrangements, including accessing Coles' own-brand product range.

Coles share price snapshot

Over the last month, Coles shares have dropped 5.5%.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. 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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