Why Goldman Sachs just upgraded Coles shares

The broker has become a lot more positive on this supermarket giant.

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Coles Group Ltd (ASX: COL) shares are having a good session on Thursday.

In afternoon trade, the supermarket giant's shares are up almost 2% to $16.48.

Why are Coles shares rising today?

Today's gain appears to have been driven partly by the release of an upbeat broker note out of Goldman Sachs.

Although the broker is not recommending the company as a buy, it has taken its sell rating off its shares.

According to the note, the broker has upgraded Coles shares to a neutral rating and improved the price target to $16.30 (from $15.40).

What did the broker say?

Goldman first explained why it previously had a sell rating on the supermarket operator's shares. It said:

We downgraded COL in Sep 2022 on the thesis that Cole's e-Comm (Ocado) strategy, with its next day and structurally more expensive model, would lead to market share losses and its entrance into a high investment cycle for digital and supply chain would pressure margins over FY23-25. Since we downgraded on 13 Sep2022, COL has fallen 6% vs the ASX 200 of +11%. Since then COL has: 1. Delayed the Ocado facilities multiple times, increasing capex to ~A$400m as well as factoring in higher than expected implementation costs. 2. Reported unexpectedly high stock-losses due to store/digital under-investment; which continues to hit margins.

However, the broker is now feeling a lot more positive on Coles and its shares following the release of its half-year results and third-quarter sales update. It explains:

Following the 1H24/3Q24 results and recent channel checks we have become more positive on COL on the basis: 1. New CEO has actively addressed margin/loss issues with now 346 stores with skip scans and 286 with smart gates; 2. Demonstrated strong retail execution including the effective communication of value to consumers via various price programs, collectibles and protein availability in 3Q24 resulting in ~360 bps of sales growth difference vs WOW and further cost-out of A$1B Simplify and Save across 4 years; 3. Faster scaling of Retail Media, which is significantly accretive to the Food segment margin, together with its digital and loyalty program, re-activating Flybuys active members to 9.4mn.

Should you invest?

While Goldman only has a neutral rating on Coles shares, there are brokers who are much more bullish.

One of those is Morgans, which recently put an add rating and a $18.95 price target on its shares. This implies a potential upside of approximately 15% for investors over the next 12 months.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. 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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