The Coles Group Ltd (ASX: COL) share price will be one to watch on Wednesday.
This follows the release of the supermarket giant's first quarter sales update this morning.
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Coles share price on watch after first quarter update
For the three months ended 30 September, Coles reported a modest 1.3% increase in group sales over the prior corresponding period to $9,891 million.
This was driven by a 1.6% increase in supermarket sales to $8,771 million and an 8.4% lift in express sales to $284 million, which offset a 4.3% decline in liquor sales to $836 million. On a comparable store sales basis, Coles' supermarket sales rose 2.1% and its liquor sales dropped 4.1%.
Segment performance
In respect to its supermarkets business, management notes that its growth was achieved despite cycling heightened COVID-19 related sales in the prior corresponding period and customers returning to dining out at cafes and restaurants. Its sales were supported by strong trade plans, including the "Locked" value campaign as well as the Harry Potter "Magical Builders" collectibles and Schott Zwiesel glassware customer continuity programs.
Coles also benefited from supermarket price inflation of 7.1% for the first quarter compared to 4.3% in the fourth quarter. Fresh inflation was 8.8% and continued to be driven by the bakery channel, reflecting higher wheat prices, and fresh produce, particularly in berries and bananas.
As for its liquor sales, they were down 4.3% due to the business cycling COVID-19 lockdowns in New South Wales, Victoria and the Australian Capital Territory in the prior corresponding period. Excluding these states and their bulk sales, liquor sales grew in the first quarter.
In other news, the company confirmed that it is on track to deliver cumulative Smarter Selling benefits of $1 billion by end of FY 2023 under its four year program. Furthermore, the Witron Queensland automated distribution centre is being commissioned, with the first Ocado "Bots" recently arriving in New South Wales.
How does this compare to expectations?
The company's first quarter performance appears to have fallen short of the expectations of analysts at Goldman Sachs, which could be bad news for the Coles share price today.
For example, a recent note reveals that its analysts were forecasting a 2.5% increase in Supermarket same store sales and a 1% decline in liquor same store sales. Coles has missed on both metrics.
Management commentary
Coles' CEO, Steven Cain, was pleased with the quarter. He said:
Despite record levels of hospitality expenditure in Australia, we are pleased that a strengthening sales trajectory is being driven by improved availability, new value campaigns, and the unwind of local shopping as consumer shopping behaviour normalises. Our commitment to providing trusted value, including Australia's widest range of own brand products and the successful introduction of 'DROPPED & LOCKED' prices, is more relevant than ever with rising inflation placing pressure on many Australian households.
Outlook
Management appears positive on its sales outlook for the second quarter. It advised:
Sales, volumes and transactions strengthened through 1Q23 which has continued into 2Q23 with improvements in availability and the introduction of new value campaigns, including 'DROPPED & LOCKED'. Cost price inflation is expected to increase in the second quarter, given the ongoing level of supplier CPI requests as well as further flooding impacting supply volumes.
However, it has warned that the company is "not immune to the inflationary cost pressures, including the impact from increased logistics and fuel costs, salary and wages and construction costs on capital expenditure projects."
As a result, it expects its depreciation and amortisation expense to be approximately $1.7 billion in FY 2023. This is up from $1.52 billion in FY 2022. This could put pressure on its profit margins.
