Morningstar | Coles Announces Strategic Review to Combat Industry Headwinds. AUD 12.30 FVE Unchanged.
Coles’ food sales growth nearly evaporated in second-quarter fiscal 2019, after the successful "Little-Shop" campaign funnelled customers to its stores and away from Woolworths in the first quarter. This tracks our expectations for food sales growth to significantly slow, and our sales and NPAT estimates for Coles are virtually unchanged. We maintain our fair value estimate of AUD 12.30, with shares currently fairly priced.Supermarket like-for-like sales grew 1.5% in the second quarter, down from 5.1% growth in the previous three months. So far, momentum hasn’t picked up in the second half of fiscal 2019. We estimate supermarket headline sales were 3.8% in the half, just shy of the overall Australian food retailing market at 4.2%. Coles’ supermarkets particularly underperformed and lost market share in New South Wales, where the flagging appeal to customers of an ageing stores exceeded the positive impact of strong online sales growth in the state. The sales growth wasn’t enough to offset the cost pressures from higher wage and energy costs, and the one-off labour expenses related to discontinuing single use plastic bags. Food EBIT margins declined slightly by 12 basis points. We maintain our 2.6% headline sales growth and flat 3.9% EBIT margin estimates for Coles for the full fiscal year 2019.
In response to poor results, Coles announced a "strategic refresh" broadly focusing on improving the online platform, refurbishing existing stores and rolling out new formats, driving supply chain efficiencies, and bolstering customer confidence by moving more products to Every Day Low Pricing, and away from promotions. More detail on the strategic review will be revealed at the group’s strategy day in June 2019. However, in our view, a strategic repositioning of Coles’ business is unlikely to result in a sustainable competitive advantage over market leader Woolworths, which has the cost advantage due to its greater scale. We maintain our no-moat rating for Coles.
Despite online sales growing a strong 30%, we suspect the e-commerce business impacted Coles’ cost structure, given they are margin-dilutive. As online sales continue to grow--and management hasn’t seen them slowing--we expect a further drag on food EBIT margins. We forecast online sales to increase 17% on average over the next five years, versus in-store sales growth of only 3% over the period.
However, the shift of sales to the lower-margin online channel is only one of the structural headwinds for Coles in the medium term. The core supermarkets segment accounted for 82% of group EBIT and is also grappling with intense competition from Woolworths across all channels--Aldi, and soon Kaufland, in the discount channel; and online from Amazon Australia. As a result, we see EBIT margins constrained at 4% long term.
Coles’ liquor segment took market share. We estimate New Year’s Eve-adjusted headline sales growth was 1.8% in the first half, ahead of the Australian liquor retailing market at 1.3%. The sales growth was lower than our previous full-year estimate of 4.2%, and we reduced our expectations to 1.8% headline sales in fiscal 2019. Nonetheless, we expect liquor sales growth to rebound to 4% over the following five years, fuelled by population growth and price inflation. EBIT margins improved by 29 basis points, due to a higher margin product mix and operating efficiency gains. We maintain our liquor EBIT margin estimate at 4.0% for fiscal 2019, a 10-basis point improvement on the prior year. Long term, we expect EBIT margins to average 4% in liquor. The liquor segment only represents 8% of group sales and 12% of EBIT and the impact of our changes on our fiscal 2019 sales and earnings estimates is negligible. Management provided no update on the potential sale of its gaming operations which underpin the profitability of the liquor segment’s 87 pubs.
As announced on Feb. 6, 2019, Coles effectively exited its petrol business, following in Woolworths’ footsteps after several years of challenging operating conditions. From March 2019, petrol revenue will no longer be reported. The removal of fuel sales drives our unchanged forecast of a decline in group revenue of 1.9% and 6.1% in fiscal 2019 and 2020, respectively. The convenience segment contributed 7% to group EBIT in the first half, but going forward, we estimate the truncated business to account for only 3% of Coles’ operational profits.
COL Financial Group, Inc. (COL) is a Philippines-based company that provides online financial services. The Company is engaged in the business of broker of securities. It provides stock brokerage services through Internet technology. The Company operates through two segments: Philippines and Hong Kong. It is also engaged in providing financial advice, in the gathering and distribution of financial and investment information, and statistics and in acting as financial, commercial or business representative. It offers various products and services, which include full-service online stock brokerage, selection of mutual funds in a single platform, professional equity advisory services, research support, investor education seminars, market updates and information-driven briefings and customer support. COL provides professional equity advisory services through its agency and advisory groups (AAG) consisted of the private client group (PCG) and the independent financial advisors (IFA).
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