15 February 2017
Coles reports slowdown in H1

Coles has reported H1 sales for the period ending 31 December 2016 of AU$20,277m, a decline of 0.2% on the previous year. Earnings before interest and tax also declined 2.6% to AU$920m.

Food and liquor sales up 2.2% to AU$17,020m

Coles' food and liquor division maintain positive growth, despite slowing down considerably from H1 2015, when sales grew 5.4%. Sales also slowed throughout the half, with total sales growing just 1.6% in Q2. LFL sales grew 1.3% in the half, but also slowed, growing just 0.9% in Q2.

Coles mentioned that the slowdown was aided by stronger price deflation verses previous periods, but that it also remains committed to its ongoing focus on lowering prices. Alongside price, work to improve quality, availability and service remain a top priority, with management expressing that despite slowing sales they feel well placed as transactions and basket size continued to grow.

Other positives highlighted include, Coles Online and Coles Financial Services achieving strong growth, plus Flybuys increasing the number of active users. Sales were boosted by ongoing property work, with four net new supermarkets opening in the half and 32 stores renewed.

Liquor turnaround continues

Liquor continued to achieve positive LFL growth in the half, driven by an increase in transactions and ongoing work as part of the businesses five year turnaround plan. Coles plans to further accelerate improvements to the Liquorland network going forward, with more stores planned for renewal. The retailer also mentioned that it plans to roll out more of its new Liquor Market big box format store, having tested the first store in Melbourne last year.

Convenience sales declined 11.2% to AU$3,257m

Lower fuel volumes and lower prices continued to impact sales. On a more positive note, the resurgence in convenience store sales continued, growing 6.4% in the half or 2.5% on a LFL basis. During Q2 total and LFL sales grew 5.5% and 1.8%, respectively. As in previous statements, Coles put this resurgence down to stronger food-to-go ranges and lower prices at its forecourt stores.

Toughening market conditions

Many analysts, including ourselves, had been predicting a bumpier time ahead for Coles, given the resurgence of market leader Woolworths and Aldi's ongoing aggressive expansion. Coles remains committed to its current strategy of lowering prices, delivering a better store network for customers and investing in simplicity to fund longer term sustainable growth. It also remains committed to offering customers a strong convenience and fuel offer, despite Woolworths recently selling off its fuel business to BP. In broader news, parent company Wesfarmers has started a strategic review of its Officeworks business.

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