Coles share price rises as Q1 sales hit $8,695 million

The market reaction at a glance

Size does indeed pose its own set of unique problems.

Such was highlighted by the Coles (ASX: COL) Q1 FY20 results today. Here, the super-sized supermarket chain reported low single-digit revenue growth and even lower comparable sales growth.

It’s not all subdued, mind you. These figures were enough to entice investors into the game it would seem: with the Coles share price rising an impressive 2.68% – to A$14.95 per share – by the afternoon session.

Momentum has indeed been on the side of Coles investors in the last six months, with the supermarket’s share price running approximately 18% higher in that period.

Coles share price: what’s in the Q1 grocery basket?

On the top-line, Coles noted that revenue from Supermarkets hit A$7,705 million in Q1 – an increase of 1.6% on a quarter-over-quarter basis. In step with this, comparable Supermarkets sales growth came in just 0.1% higher during the quarter.

This was down from the first quarter of FY19, where comparable sales growth peaked at 5.1%. Coles attributed such a super-normal growth rate as related to its incredibly successful Little Shop campaign. Management also noted that on the front of such campaigns – competition has increased significantly in recent times, with Woolworths launching their own Little Shop competitor by way of Lion King collectibles; as a means of capitalising on these ‘little’ trends, presumably.

Overall, Coles Group revenue hit A$8,695 million in Q1.

It’s not all single digit growth mind you. For instance, Coles Online revenue rose an impressive 23.5% in Q1 – as the A$19 billion company fast builds out its digital capacities. Coles noted that 'Click & Collect remains the fastest growing channel for online and is now available in all states.'

Finally, Coles Liquor sales also grew slightly faster when compared to Supermarket sales – rising 3.5% during the first quarter of FY20 and reaching A$726 million.

Here, the company commented that such growth, 'was driven by a strong performance in First Choice, supported by the roll-out of the First Choice Liquor Market renewal program, and contributions for Exclusive Liquor Brand, offset by softer trading conditions in Liquorland.’

The CEO and the outlook

Speaking of these results, Coles's Chief Executive Officer, Steven Cain positively noted that:

'The refreshed strategy we set out to Win in Our Second Century has helped us to deliver a positive set of results for our first quarter.

Yet maybe more importantly were thesomewhat forward-facing comments from Mr Cain, that:

‘The increased sales momentum we are seeing in the second quarter demonstrates that the changes we are making to inspire customers are already making a difference.'

This notion of momentum aside, in the last couple of days some brokers have expressed a relatively bearish view on the supermarket giant, according to Bloomberg Data. Credit Suisse, for example recently hit Coles with an ‘underperform’ rating and a price target of A$13.23.

J.P. Morgan’s outlook is even more dour – they’re underweight the stock and have a 12-month price of just A$12.00 on Coles. JP cites increased consumer spending as a possible upside catalyst for the share price, while noting the potential for Westfarmers to sell down its 15% holding in Coles (ASX: COL) as a key downside risk.

It will be interesting to see what other brokers do in the days ahead.

Regardless of that, for now Mr Market seems happy. How long that lasts is anyone’s guess.

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