Coles Group Ltd (ASX: COL) stock has suffered a major dip in the last couple of months, down 9% since 20 September 2024. So, could this be the right time to look at the ASX supermarket share?
If I were going to invest in any ASX blue-chip share, I'd rather buy them at a lower price than a higher price, so this lower valuation may be more appealing.
The company recently announced its latest quarterly update. I don't think investors should put too much weight on just one quarter's numbers, but it is the most relevant information and commentary that we can go off.
So, let's remind ourselves what the supermarket company said about its performance for the first 13 weeks of FY25 from 1 July 2024 to 29 September 2024.
Quarterly sales update
Coles reported that its group revenue increased by 2.9% in the FY25 first quarter to $10.55 billion, with 3.5% growth in the supermarket division's revenue to $9.5 billion. Liquor revenue was flat at $851 million, and other revenue declined by 11.2% to $190 million.
However, supermarket e-commerce growth was strong at 22.4%, though liquor e-commerce sales declined 1.9%. Supermarket e-commerce sales made up 10.8% of total sales.
Interestingly, inflation has significantly decreased at Coles supermarkets, but it remains inflationary rather than in deflation.
Excluding tobacco, overall inflation at the supermarkets was 1%. Excluding tobacco and 'fresh', inflation was 0.1%. Inflation in the fresh category was driven by fresh produce, as it cycled strong growing conditions and surplus fruit and veg last year.
Pleasingly for Coles, its Coles Finest range is resonating with customers, which saw revenue growth of 8.9%. Meanwhile the Coles Simply brand awareness continues to grow, and it saw a "significant" uplift in sales in a number of categories.
In the outlook, Coles said its sales growth had remained broadly in line with the first quarter, with volume growth supported by increasing value for customers.
Coles also announced after the successful completion of construction of its new automated distribution centres (ADCs) in Queensland and New South Wales that it's going to construct one in Victoria. This project is expected to start in FY25.
Is the Coles stock price a buy?
I like what Coles is looking to do across a variety of areas, such as its efforts to be more sustainable, provide more exclusive and own brand products, and improve efficiencies with its automated distribution centres and customer fulfilment centres.
While there is the headwind of inflation in its costs, harming profitability, it's doing well in supporting its margins in other ways.
The ACCC investigation could be economically painful for Coles (and Woolworths Group Ltd (ASX: WOW) ) if the ACCC is successful against the supermarkets. But, I view this as a shorter-term, one-off issue. I don't think it permanently reduces the value of Coles stock.
Ultimately, I believe Coles' profit and dividend can continue growing in the long term, particularly with the tailwind of Australia's growing population.
According to the forecasts on Commsec, the Coles stock price is valued at 20x FY26's estimated earnings with a projected dividend yield of 4.2%, or 6% grossed up (including the franking credits).
