Why the Coles share price could keep rising after the result

An expert has predicted more share price gains for Coles.

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The Coles Group Ltd (ASX: COL) share price jumped more than 5% yesterday after investors saw the FY24 first-half result and the trading update. It's up another 1% today.

Supermarket profits are under heavy scrutiny at the moment because of all the inflation. Let's look at what the actual numbers tell us.

Earnings recap

Coles said that for the first eight weeks of the third quarter, supermarket sales grew by 4.9%, underpinned by volume growth. It reported it's seeing deflation in fresh produce and meat, while packaged goods are seeing "continued moderation" in inflation. Liquor sales declined by 2.2% over the same eight-week period, due to reduced discretionary spending.

In the FY24 first half, supermarket sales were up 4.9% to $19.8 billion and total continuing operations sales grew by 6.8% to $22.2 billion.

The supermarket HY24 gross profit margin grew by 10 basis points to 26.6%, though the reported earnings before interest and tax (EBIT) fell by 17 basis points to 5.1%. The overall supermarket inflation was 3% for the half and 4.8% excluding tobacco and fresh.

Total underlying EBIT for the continuing operations rose 3.3% to $1.11 billion.

Reported net profit after tax (NPAT) from continuing operations declined 3.6% to $594 million, while underlying NPAT from continuing operations fell 0.3% to $626 million.

While the first six months of FY24 were not that impressive, the trading update's sales growth was strong and beat the growth reported by Woolworths Group Ltd (ASX: WOW).

Why the Coles share price could keep rising

According to reporting by the Australian Financial Review, E&P Capital retail analyst Phillip Kimber said in a note to clients:

A better-than-expected result and improving sales momentum for Coles Supermarkets in early 3Q24 (much better than Woolworth's Australian Food) is expected to support further share price gains.

After a period of seeming negative about the company, analysts now appear positive about the outlook for the business.

The Australian reported that S&P Global Ratings said:

We expect the Australian retailer's nondiscretionary operations, scale, and cost-saving initiatives will underpin earnings through 2024.

With consumers' household expenditure under pressure, we expect Coles' own-brand products will continue to attract value-conscious customers and support sales growth.

Time will tell whether Coles shares do rise more this year, but things now seem to be looking up for the company.  

Will inflation scrutiny hurt (the Coles share price)?

If Coles' margins (and/or revenue) decrease as a result of shelf price decreases, then this would weigh on profitability, which may harm the Coles share price (in the short-term).

The Motley Fool's Scott Phillips had the following to say to the ABC about Coles and the inflation situation:

I don't think there is obvious evidence of widespread price gouging, or their margins are unreasonable and maybe more importantly even if they were reduced, I'm not sure the size of the [savings] prize per Australian is really that big.

When talking about whether shoppers would prefer the supermarkets to make no profit at all, Phillips said:

At the end of the day, any business wants a return on the capital that's being employed to produce the goods and services that we want.

You want to get some sort of return for that investment. Otherwise you say, 'I'm going to take my money and do something else with it'.

And so at the one level we don't want them to make so much money that the rest of the country is poorer as a result, and on the other hand we want enough of an incentive for these guys to actually stay in business and do something for us.

As always, we want the incentive that capitalism provides, we just want to make sure it's appropriately regulated so no one's taken advantage of.

Coles share price snapshot

Since the start of 2024, the Coles share price has risen by 5%.

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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