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Highlights
- Coles shares are down 7%, creating a potential buying opportunity.
- The ACCC investigation could lead to a one-off fine but unlikely to impact long-term value.
- Coles is positioned for growth with rising e-commerce sales and a growing population.
Coles Group Ltd, listed on the Australian Securities Exchange under the ticker COL, has seen its share price decline by 7% over the past month, a drop that some investors might view as an opportunity to buy into a defensive stock. While this percentage might seem modest, for a company like Coles, known for its stability, such fluctuations can signal underlying challenges.
The primary catalyst for this recent dip is the ongoing investigation by the Australian Competition and Consumer Commission (ACCC). In September, the ACCC initiated legal proceedings against Coles and rival Woolworths Group Ltd, alleging that both companies had engaged in misleading pricing practices. According to the ACCC, both supermarkets had raised prices on various products by at least 15% before advertising price drops that, while appearing lower, were often equivalent to or higher than previous regular prices.
In response, Coles has asserted its innocence, explaining that these price changes occurred during a period of "significant cost inflation." The company has emphasized its efforts to balance rising costs with customer value, aiming to resume promotional activities promptly after establishing new pricing structures. While the outcome of the ACCC's action remains uncertain, including the possibility of a hefty fine, it seems likely that the impact of this investigation will diminish over time.
Despite the current turbulence, many analysts believe that Coles's long-term fundamentals remain strong. The company is experiencing several favorable trends, such as a growing Australian population and increasing digital engagement. More shoppers naturally lead to higher revenues, particularly as Coles adapts to evolving consumer behaviors. The company reported a remarkable 30.1% growth in e-commerce sales in its supermarkets division during FY24, alongside a 9.2% rise in its liquor business.
The main focus for investors is whether Coles can continue to generate earnings growth. The supermarket giant is investing in automated distribution centers, which could enhance operational efficiencies and improve profit margins over the long run. Broker UBS has projected that Coles could generate a net profit of $1.16 billion in FY25, increasing to $1.42 billion by FY27. This 22% expected growth over two years provides a positive outlook for investors.
Furthermore, with its recent decline, Coles shares may offer better value, particularly for income-focused investors. UBS forecasts a grossed-up dividend yield of 5.8% in FY25, with potential for annual growth in dividends thereafter. While such forecasts are not guaranteed, they indicate that the company's underlying value could remain robust despite recent challenges.
