Coles Group Ltd (ASX: COL) shares are having a disappointing end to 2023. Since the start of August 2023, the Coles share price has dropped 14.5%, as we can see on the graph below.
The company's revenue has continued to climb as Australia's population grows and inflation adds to shelf prices. However, costs have been rising too.
So could the supermarket giant fare better in 2024? Let's take a look.
What did the ASX share say about the outlook?
Coles has the best insight into what's going on with its business.
The company reported in the first quarter of FY24, sales at its supermarkets and liquor were up 4.7% and 1.8% respectively, with supermarket e-commerce revenue up 24.6% and liquor e-commerce revenue growth of 32.2%.
Coles told its annual general meeting (AGM) that availability in stores was improving and inflation in key categories was "moderate". The supermarket business noted fresh produce and red meat were "in deflation" with lower prices year over year on cucumbers, berries, beef and lamb. First quarter inflation was 3.1%, or 5.7% excluding tobacco and 'fresh'.
The company aims for its new 'simplify and save to invest' program to achieve $1 billion in cumulative savings over the next four years.
Coles' Redbank automated distribution centre in Queensland already services 219 stores, and it's working toward the Kemps Creek location in NSW receiving its first inbound deliveries in the third quarter of FY24. The first customer fulfilment centre is scheduled to go live in NSW in the middle of the 2024 calendar year.
However, the company estimated in its FY23 result that the recent increase in the Victorian payroll tax would impact by "approximately $20 million per annum". Additionally, Coles said the Fair Work Commission annual wage increase means store remuneration will increase by 5.75%.
Forecasts for Coles shares
After seeing the Coles FY24 first quarter update, the broker UBS noted that supermarket inflation was lower and volumes improved.
UBS suggests population growth and "trading down from out of home" eating support sales growth at supermarkets, ignoring inflation. However, the broker is concerned Coles is not executing as well as its rival Woolworths Group Ltd (ASX: WOW). And "its broader position in market suggests greater risk of share loss to Aldi".
UBS also warns the earnings before interest and tax (EBIT) margin could decline despite initiatives to boost the gross profit margin. Theft is a key issue in the broker's eyes, though higher wages, costs from the distribution warehouses and higher depreciation and amortisation are also expected.
However, UBS thinks Coles' efforts ('skip scan' and smart gates in 250 of the most impacted stores at the end of 2023) will help reduce excessive theft.
UBS has forecast Coles could generate earnings per share (EPS) of 74 cents in FY24 and pay a dividend per share of 60 cents. That would put the Coles share price at 21x FY24's estimated earnings with a grossed-up dividend yield of 5.5%.
