Why Coles shares were just downgraded by Bell Potter

The broker is no longer recommending the supermarket giant as a buy.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Coles Group Ltd (ASX: COL) shares could be fully valued now.

That's the view of analysts at Bell Potter, who have just downgraded the supermarket giant's shares.

a woman holds her hands to her temples as she sits in front of a computer screen with a concerned look on her face.

Image source: Getty Images

What is the broker saying?

Bell Potter has been looking at Coles' third-quarter update. While it was pleased with the performance of its Food business, it was disappointed with its Liquor business. It said:

Supermarkets: Revenue growth of +4.0% YOY to $9,781m, compared to our $9,692m forecast (and VA of $9,770m). Growth in the early part of 4Q26e has continued at rates comparable to 3Q26 and this compares to the +3.7% YoY growth recorded in the first eight weeks of the quarter. Outperformance relative to the sector seen in 4Q25-1Q26 looks to be continuing, albeit at a slower rate than that of WOW. E-commerce sales grew +24.8% YoY, reaching 13.6% of sales.

Liquor revenue down -3.9% YoY at $781m (BPe $814m and VA $784m), with 13 net store closings in the period. E-commerce sales grew +1.8% YoY and accounted for 7.3% of sales. The category remains competitive.

This has led to the broker trimming its earnings estimates. It explains:

EPS changes -3% in FY27e and -2% in FY29e. Changes reflect softer liquor sales growth, modestly lower GM assumptions in supermarkets and higher base interest rates.

Coles shares downgraded

In response to the update, the broker has downgraded Coles shares to a hold rating (from buy) but with an improved price target of $22.80 (from $22.35). This is only a touch ahead of where its shares are trading at currently.

Bell Potter made the move largely on valuation grounds. However, it also notes that competition is increasing for its food business at a time when food inflation is rising.

And while Coles shares trade at a discount to Woolworths Group Ltd (ASX: WOW) shares, it sees better value opportunities elsewhere in the consumer staples space. It said:

We downgrade our rating from Buy to Hold. The shortfall between retail shelf price inflation and underlying food inflation in both WOW and COL has widened in the recent quarter. The competitive backdrop appears to be lifting and liquor remains challenged in a rising cost environment. Trading a discount to WOW, there is a relative value argument to be made, particularly given the more limited exposure to discretionary channels in the near term, however we see more compelling GARP opportunities elsewhere in the consumer staples space at this juncture.

Motley Fool contributor James Mickleboro has positions in Woolworths Group. 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 Woolworths Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Broker Notes

A businessman lights up the fifth star in a lineup, indicating positive share price for a top performer
Broker Notes

Bell Potter names the best ASX shares to buy in August

These could be the best of the best according to the broker.

Read more »

three excited doctors with hands in the air
Broker Notes

Buy, hold, sell: Super Retail, APA, Sonic Healthcare shares

As earnings season continues, brokers have issued new ratings on these 3 ASX 200 shares.

Read more »

A woman in a red dress holding up a red graph.
Broker Notes

3 ASX shares UBS says will return better than 36%

These three companies have big things ahead, according to UBS.

Read more »

Young successful engineer, with blueprints, notepad, and digital tablet, observing the project implementation on construction site and in mine.
Broker Notes

Up more than 200% over a year, could this ASX lithium company double again?

The potential upside on these shares might surprise.

Read more »

Broker written in white with a man drawing a yellow underline.
Broker Notes

Buy, hold, sell: Fortescue, Northern Star, and Megaport shares

Morgans has updated its views on these shares.

Read more »

Man with his hand on his face reading a letter with bad news in it.
Broker Notes

Why were Goodman shares just downgraded?

Bell Potter has cut its rating on the industrial property company.

Read more »

Cheerful smiling businesswoman sitting on a chair and typing business report on a laptop keyboard.
Broker Notes

Broker puts fresh buy ratings and tips 36% upside for these earnings results winners 

These two shares have received upgraded outlooks.

Read more »

A distressed young woman reads bad news on her smartphone while standing in a modern indoor setting.
Broker Notes

Why were Telix shares just downgraded?

Bell Potter has become less bullish on this biotech.

Read more »