Why did Coles shares underperform the ASX 200 so much in FY24?

FY24 was a disappointing year for Coles shareholders.

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A female Woolworths customer leans on her shopping trolley as she rests her chin in her hand thinking about what to buy for dinner while also wondering why the Woolworths share price isn't doing as well as Coles recently

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Coles Group Ltd (ASX: COL) shares significantly underperformed the S&P/ASX 200 Index (ASX: XJO) during the 12 months to 30 June 2024. Coles shares fell by 7.5%, while the ASX 200 rose by 7.8%, which means there was underperformance of more than 15%.

It may be surprising to see a performance like this because Coles' supermarket earnings are generally seen as defensive. But, it didn't play out like that.

As the chart below shows, the Coles share price declined significantly last year following its FY23 update, its FY24 outlook commentary, and the Ocado update.

What happened to Coles shares?

In mid-August 2023, Coles said it had received notification from Ocado that the handover of the Victorian customer fulfilment centre (CFC) would be delayed.

Additional works were required to rectify construction issues with the grid identified during quality control processes for the Victorian CFC. Ramp-up is now expected to start in mid-FY25.

The NSW CFC being built by Ocado was expected to be commissioned at the end of FY24 rather than during the second half of FY24.

Impacts of those delays are expected to increase the project capital and operating expenditure by approximately $70 million and $50 million respectively.

When Coles talked about its FY24 outlook commentary, it noted that headline inflation was moderating (which reduces sales growth). It also said stock loss (theft) was elevated and it was taking action to rectify this.

Latest update

Coles hasn't released its FY24 result yet, so the latest shareholders information that can be used to analyse Coles shares is the FY24 third-quarter update.

For the 12 weeks to 24 March 2024, supermarket revenue rose by 5.1% year over year to $9.06 billion, and total sales rose 3.4% to $10 billion. Supermarket e-commerce sales jumped 34.9%, but total liquor sales declined 1.9%.

In the early part of the fourth quarter, the ASX share said that its supermarket volumes had remained "positive", helped by its "value campaigns and strong execution of trade plans."

Coles has continued to see deflation in fresh produce and meat, with moderation in inflation across its broader packaged categories. The company said this was pleasing "given the current economic environment."

The business has also made "good progress" on addressing its loss, which is expected to continue in the fourth quarter.

However, in liquor, discretionary spending was expected to remain "subdued", with sales in the early part of the fourth quarter "broadly in line" with the third quarter.

Coles expects its new Kemps Creek automated distribution centre and two CFCs to help improve efficiencies and differentiate its offer.

Profit estimates for Coles shares

Broker UBS thinks Coles will generate $43.8 billion in sales and $1.07 billion in net profit in FY24. The broker also forecasts that Coles shareholders could receive an annual dividend per share of 72 cents.  

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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