The Coles Group Ltd (ASX: COL) share price has performed quite well since the start of 2023, rising by around 7%.
That compares to a return of just 0.2% for the S&P/ASX 200 Index (ASX: XJO). The index is suffering today amid banking problems in the northern hemisphere with Silicon Valley Bank and now Credit Suisse.
As for Coles, its share price last traded above $19 in August 2022. But much has happened since then, with multiple interest rate rises in Australia, as well as annual inflation still stubbornly high.
For me, one of the biggest drivers of longer-term share price performance is profit improvement and plans for business improvement.
Despite the Coles share price being down close to 10% since August 2022, the company has actually delivered sales and earnings growth since then.
Earnings recap
In the recent FY23 half-year result for the 27 weeks to 1 January 2023, Coles said that its continuing operations sales revenue had increased 3.9% to $20.8 billion. At the same time, earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 7.6% to $1.8 billion and earnings before interest and tax (EBIT) went up 9.9% to $1.06 billion.
Continuing operations net profit after tax (NPAT) increased 11.4% to $616 million, while earnings per share (EPS) rose 11.6% to 46.3 cents.
This enabled dividend growth of 9.1% to 36 cents per share.
Coles is divesting its Coles Express to Viva Energy Group Ltd (ASX: VEA), which is why the supermarket business has outlined its 'continuing operations' earnings so investors can see the performance of the ongoing business.
By the end of FY23, the business is expecting to achieve cumulative smarter selling benefits of $1 billion across its four-year program. Some of these benefits include trolley-assisted checkouts, energy reductions across heating, ventilation, and cooling, measures to tackle theft, and the use of advanced analytics and store-specific data to "markdown rates".
Can the outlook drive the Coles share price higher?
Coles said that in the third quarter of FY23, its supermarkets' volume growth returned to "modestly positive" from mid-January.
However, supplier input cost pressures remain, "particularly related to packaged goods, wages and energy".
In January, the supermarket business commenced operations at the Witron automated Queensland distribution centre, with the receipt of its first inbound supplier deliveries. It's expecting to ramp up operations in the fourth quarter of FY23.
I think that the new distribution centres can help improve Coles' efficiencies and profit margins. The business has made the right moves, in my opinion, by investing in these impressive buildings.
With ongoing food inflation and a return to volume growth, I think Coles will be able to deliver profit growth and dividend growth.
With the current Commsec estimates, the Coles share price is valued at 22x FY23's estimated earnings with a potential grossed-up dividend yield of 5.3%. With ongoing profit growth expected over the financial years to FY25, I think Coles will be able to generate more investor interest and rise to $19 and beyond.
My colleague James Mickleboro also reported on Citi's $20.20 price target on Coles, which implies the next 12 months could be a promising time for investors.
