Coles Group Ltd (ASX: COL) shares are approaching an important test this week.
The supermarket giant is preparing to release its first-quarter FY27 sales update on Friday, giving investors another opportunity to assess how the business is performing.
I'm interested in whether the company can build on the progress it made last financial year.
So, with Coles shares trading around $24.00, would I buy before the announcement? Here's what I think.
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What should investors expect?
I think there's good reason to expect another respectable performance from Coles' supermarket business.
The company has been making progress with its customer offering, improving product availability, expanding online shopping, and strengthening its competitive position.
These efforts helped Coles gain market share and increase supermarket sales by 3.7% in FY26.
And management indicated in August that sales growth during the first eight weeks of FY27 was consistent with the final quarter of FY26.
That's an encouraging starting point for this week's announcement.
According to UBS, it expects Coles to report first-quarter group sales of approximately $11.29 billion, representing growth of 3%.
That would come despite continued weakness in its liquor business, where UBS expects sales to decline 2.1% to $824 million.
I think the supermarket performance will be the main thing to watch. I'll be interested in whether Coles is continuing to attract new customers, particularly given the improving sales momentum at rival Woolworths Group Ltd (ASX: WOW).
And with households remaining conscious of their spending because of higher interest rates, demonstrating that it can offer competitive prices while protecting profitability will be important.
Why I'd buy Coles shares
One reason I'm optimistic about Coles is the progress it has made improving its operations.
The company has invested heavily in automated distribution centres and online fulfilment infrastructure, which should help it operate more efficiently as volumes increase.
I think these investments could become increasingly important over the coming years.
Coles has already demonstrated the benefits of improving its operations. In FY26, supermarket earnings before interest and tax increased 12.2%, comfortably ahead of sales growth.
That suggests the company is becoming better at converting revenue into profits. And I think there is scope for further improvement as its technology investments mature and management continues working on costs.
Of course, competition remains strong, and the liquor business has more work ahead of it.
But I like the direction Coles is heading.
What about the valuation?
Coles shares trade on a PE ratio of approximately 24.4 times forecast FY27 earnings, based on consensus estimates.
That's not a bargain valuation for a supermarket operator. But analysts expect earnings per share (EPS) to increase from 98.2 cents in FY27 to $1.15 by FY29.
I would argue that this growth and its defensive qualities justify a premium valuation for Coles.
There is also an income component to consider, with forecast FY27 dividends of 83.5 cents per share representing a dividend yield of approximately 3.5%, before franking credits.
For me, that's a reasonable proposition for an established business with relatively dependable demand.
Foolish takeaway
I would be happy buying Coles shares ahead of Friday's results.
Coles has impressed me with its operational progress, and I think there is more to come.
If management can maintain sales momentum while continuing to improve profitability, I believe shareholders could be rewarded over the next few years.
