Can Coles shares reach $16 by Christmas?

Should investors think about putting this stock in their shopping basket?

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The Coles Group Ltd (ASX: COL) share price has seen pain in the last few months, down 17% from 1 August 2023, as we can see on the chart below.

Coles had a strong few years during COVID-19 and then during the first period of this higher inflation period.

The idea is that Coles can sell the same number of products for a higher dollar value, and then it can lead to higher profit if margins are maintained (or even grow).

But, the company is seeing slower sales growth, and costs are now rising. Coles is one of the biggest employers in the country, so the wage rises may bite into profitability in FY24.

Investors often like to value a business based on how much profit it is expected to make in the next year or two, so the rising cost environment seems to be weighing on investors' minds.

Can the Coles share price rise?

It certainly could, anything could happen. The ASX supermarket share could easily rise 10% or drop 10% if the whole market moved positively or negatively.

After the company delivered its FY24 first quarter, the broker UBS pointed out that the supermarket sales were lower than what the market and UBS were expecting.

Total quarterly sales from its continuing operations were up 6.7%, with supermarket sales up 4.7% to $9.2 billion and liquor sales up 1.8% to $851 million.

UBS suggests that the earnings before interest and tax (EBIT) margin is forecast to decline despite gross profit margin initiatives, with theft reportedly being a problem. But, in the second half of FY24, UBS is expecting the Coles gross profit margin to improve, with "excess theft assumed to end" because of capital expenditure on things like 'skip scan' and 'smart gates' in the 250 most impacted stores at the end of 2023.

The broker UBS has a neutral rating on Coles shares, with a price target of $16.25. So, UBS certainly thinks that Coles can reach $16 (and above), but it may take a year rather than a month.

Looking at the outlook, UBS thinks population growth and trading down from out-of-home eating could support 'real' like for like sales growth, though Coles continues to trail Woolworths Group Ltd (ASX: WOW) and its "broader position in market suggests greater risk of share loss to Aldi."

Based on UBS' estimates for FY24, the Coles share price is currently trading at 21 times FY24's estimated earnings with a forward grossed-up dividend yield of 5.6%.

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 Coles Group. 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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