Coles Group Ltd
ASX:COL
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
15.14
19.22
|
| Price Target |
|
We'll email you a reminder when the closing price reaches AUD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Coles Group Ltd
You don't have any saved screeners yet
Ladies and gentlemen, thank you for standing by, and welcome to the FY '19 Q3 sales results conference call. [Operator Instructions].I must advise you that this conference is being recorded today, Monday, the 29th of April, 2019. I would now like to hand the conference over to your first speaker today, Chief Executive Officer, Mr. Steven Cain. Thank you, please go ahead.
Thank you, and good morning, everyone. Welcome to our Q3, FY '19 sales call. I'm joined by Leah Weckert, our CFO. Can I remind everybody that this call will be focused on sales today. Obviously, a further update on strategy will be delivered at our June '18 Investor Day in Melbourne ahead of our full-year results in August. I'll briefly touch on some of the highlights of the quarter before handing over for questions. The headline we've put out is the 46th consecutive quarter of comp sales growth. That was very much driven by the success of our Stikeez campaign that successfully increased awareness of kids eating produce and vegetables. We also had a good month for Coles online with sales increasing 27%, and annualized sales now over that $1 billion mark. And of course, that was complimented by the partnership announcement with Ocado, that will see us doubling capacity over the next few years. Liquor comp sales, adjusted for New Year's Eve were 0.9% which was similar to current year-to-date performance. And we saw a strong growth in exclusive liquor brands in the wine category. The Coles Express food-to-go offer continues to show strong growth and is continuing to be rolled out despite the fact that fuel volumes continue to decline albeit the rate of decline is beginning to moderate. From a strategic perspective, we obviously, announced the new deal with Viva in March. You'll have seen their announcement today. We are very much looking forward to seeing fuel volumes grow over the medium-term to 70 million liters and already it's evident that Viva are beginning to invest in lower prices. Today, we also expect to complete our joint venture with the Australian Venue Co that will result in our Queensland pubs and hotels being managed by them. We expect to see that additional investment will go into those hotels. And that we will be able to leverage increased sales on the back of that. For those who aren't aware, that will result in around $200 million being paid to Coles. Our strategy is very much about making life easier for customers. And with that in mind, we have in the quarter established new ventures with eBay and Uber Eats. And we'll update you on those initiatives further at the Strategy Day. We've also entered in a number of other digital partnerships, most notably with Optus. That will deliver high-speed networks to all of our stores, meaning that they can download material faster, but also it will improve our customer experience overtime. So very much a solid outcome for the third quarter. We are conscious that consumer needs and demand is changing faster than ever and our competitive set is changing faster than ever, and that we need to move accordingly.I think, performance to one side, it is a delight to be able to also talk about what we've been doing in the community over the last quarter. In particular, the aid that we have managed to give to residents of Far North Queensland, Tasmania, Victoria who've all been impacted by natural disasters. And very much a big thanks to the Coles team and everyone else involved in those rescue and recovery efforts.So without any further ado, I will hand it over to questions.
[Operator Instructions] Your first question comes from the line of Shaun Cousins from JPMorgan.
Let me just ask a question regarding Fresh Stikeez. I'm just curious around you highlighted the benefit you've seen in terms of boosting basket size. I'm just curious around your ability, your confidence around sustaining that in that we saw a little shop also had this effort where -- sorry, result where it boosted basket sizes for a period of time, but it looked as though it was somewhat of a bring forward of sales from in that instance of the second quarter to the first quarter. Do you think you've enjoyed some of that in this quarter and hence, we should expect somewhat of an unwind of that tailwind of basket size from Fresh Stikeez in the fourth quarter '19, please?
Yes, hi, Shaun. I think, I'll let Leah talk to the outlook. As far as what we've seen throughout the year is concerned when we've had sales increases, it tends to be more around basket size than transactions. And of course, some of that's due to the collect schemes, it's also due to sort of flybys activity. Also what -- the challenge for us as a business is also to get off our share with the Convenience basket, which we are not achieving at the moment as we highlighted in the half year. There is a lot of focus going into making sure we drive transactions through having a better convenience offer. So Leah, over to you. Do you want to talk around outlook for the current quarter?
Yes, Shaun. So I think it's not fair to say that it's a little bit difficult to ascertain a really clear picture given that the later timing of Easter relative to last year and also some of the phasing as a result of school holidays. But based on the first few weeks of trading for Q4, we are making sure that Q4 supers and liquor comp, which is broadly in line with where we were in Q2 needs to be adjusted.
Great. And maybe just sort of, obviously, fresh inflation has made a big factor for the fourth -- for the third quarter, but dry grocery inflation still remains sort of quite subdued. Just curious, I mean, are you seeing -- is this a reluctance of who wants to pass on price rises and hence Coles are having to sort of do the same in how it, I guess, pushes back on supplies and doesn't allow sort of cost inflation come through? Or do you think in time you can get dry grocery food inflation? And is that something that Coles would want if the industry was moving that way?
Yes, look. I think, we've been clear all along, Shaun, on the pricing policy and the pricing policy is that justified price increases will be allowed. I think, we are seeing more pricing activity or price requests coming into the dry grocery area. They're just not as advanced as we've seen in some of the fresh areas. I think it's fair to say that we don't want to see rampant inflation. In fact, we have built a business for the last decade or so around making sure that Coles is a much better value place to shop. Some of what we're seeing at the moment in the deflation is very much around -- in grocery, at least, is very mature around the shift towards Own Brand which is growing at a much more significant rate than the rest of the business.
Your next question comes from the line of Michael Simotas from Deutsche Bank.
The first question for me, just a follow-on on pricing. There's, obviously, been a lot of coverage in the press about negotiations between retailers and suppliers. And I know you want to keep the strong value offer for consumers. So how do you think about that? I mean, if you do see a justified price increase from a supplier, do you then take that price increase and look to pass it onto customers? Or are you tending to have to absorb some of those price increases, which is keeping a lid on inflation?
Yes, a combination of all of the above. Milk was a good example whereby, obviously, farm gate pricing has been going up for quite some time. But we have been absorbing that. The reason we decided to increase the price there was an interim measure given that the industry solution is not going to be available until the middle of the year or so we understand.
Okay, but if you sort of look forward, are you confident that you can sort of broadly offset price increases you take from suppliers? Obviously, there'll be puts and takes, or do you think that price increases will actually be something that is going to weigh somewhat on profitability?
Yes, depends on the individual product and category and competitive set. We keep a very close eye on prices every week. And we've said before that we will maintain our competitiveness in the marketplace. So for us being competitive in the marketplace is the number one thing. We also want to make sure that suppliers have a sustainable future. And if there are reasonable price increase requests then those will go through.
Okay, all right. And then just second question for me more of a housekeeping question. You haven't called out any Easter adjustment. And I know Easter itself fell cleanly in the fourth quarter in both years, but I think historically Easter's been sort of a more of a two-way trading period. Was there a discernible impact from Easter? Or was it just not enough to callout?
Yes, not enough to callout. So we haven't, I think, Easter fell in the first quarter -- first week or at the end of the first week of the Q4. So we didn't feel it was necessary in this particular case. We have, however, adjusted for New Year's Eve because that was more material.
Your next question comes from the line of David Errington from Merrill Lynch.
Leah, can I just follow-up. I think, you said that fourth quarter has come back in line with second quarter. Is that one -- that second quarter, on my number nearly as adjusted was 1.5%. Is that right?
That is right, David. That's the super number. And you mind, I used the word moving towards. So we're not saying a definitive 1.5%, but we are directionally moving towards that.
Okay, I'm trying to get my head around your transaction growth because when you got this year, you ran at 2.2% and now you're sliding back to that 1.5%, but your inflation was up around 0.9%. I think it was about 0.5% for the first half, and in this time last year, you're actually in deflation. So when you actually adjust that this quarter on your transactions, if I just do the simple math, and I know that's pretty dangerous and I'd like to know how the best way we should look at this? Is it -- if you look at this quarter excluding inflation, your volume growth was 1.3%. This time last year it was 1.6% because you're actually in deflation. And I'm just trying to work out, it looks to me that your underlying business and then this quarter had Stikeez. This time last year, you didn't have any collectible item at all. So what I'm trying to think up is, am I looking at this the right way that excluding inflation and excluding any collectible item, your underlying business is actually going backwards in terms of transaction growth. Is that the right way of looking at it, because that's what the numbers are reflecting.
David, Steve here. Just we haven't called it out specifically, but transactions did grow in the quarter, not as much as basket size. Obviously, when we sort of talk about what's going to happen in this quarter, we are a few weeks in, so it's very difficult to call and the fact that we've just had 2 weeks of Easter trading. And we're certainly not making any call on where our transactions are heading. Clearly, we'd be disappointing if transactions did ever turn out to be negative, but that's not the case at the moment.
No but the -- what the question is, and I'll finish on this point, but the rate of transaction growth looks to be in decline. Now you are still in positive territory, but the way the math is showing, is that the growth in transactions this time last year is stronger than what it was now. And is actually that rate of growth is in decline. That's what the math is telling us. And particularly if you adjust the collectible items, if you take out the collectibles, if you don't have a collectible item in the quarter, the net rate of growth really does slow. That's what the math is saying.
Yes, I will say, we're pretty much focused on growing the sales of the business. And that's what's been achieved in this quarter. It's what we expect to achieve in the next quarter. We have talked already about what is going on in the fundamentals of the business, and I said it at the half year that one of the challenges or headwinds for us is the Convenience part of the business. And that's something that we are working on behind...
But your numbers are showing you, Steve -– I know your numbers are showing you that your rate of growth in transaction is declining the rate of growth. Is your number showing you that? Because that's what our numbers are showing us, is that what I'm -- that's the question. Is your numbers that you see is your rate of growth in transactions in decline? Because if that's the case, that would have to be a concern to you.
Our growth for the quarter on both baskets and transactions, David, is positive.
But that's not the question, Leah, it's the rate of change. I know that it's been positive territory, but what I'm thinking of is the percentage growth in decline? That's what I'm -- that's my question.
Versus the same time last year?
Yes, the momentum through the year. I mean, definitely this time last year, I mean you just do like-for-likes and adjusted for inflation and this year and then if you go and take out the collectibles, the rate of growth in transaction growth is in decline unless you're seeing numbers that we don't see. I can take it off-line, if you like.
Yes, I think it's probably best. As I've said, I'd best summarize it as account, which is we are growing our baskets, we are growing the number of transactions. We believe that we can do a better job with the Convenience customer and we're setting up the business to do that going forward. But it's not something that we're particularly focused on, on this call. It's more of a strategic issue, which is how do we create a easier small basket shop for our customers in terms of getting in and out quickly. And also the product range that we offer.
Your next question comes from the line of Richard Barwick from CLSA.
Steve, Leah, I want to talk to you about refurbs. I noticed there's only 7 completed for the quarter. We don't have great granularity on a quarterly basis, but that would have to be one of the lowest number of refurbishments ever I would have thought on a quarterly basis. What can you tell us there in terms of your plans and expectations because I would say that 7 looks to be a very, very low rate?
Yes, it is a low rate because we tried to get as many completed before Christmas. Obviously, we will update everybody in June as to what the year-end number is going to be and we'll, obviously, give a hopefully little bit more flavor of what we're trying to achieve next year. We did highlight as part of our CapEx program that we were reducing the number of renewals because we weren't achieving the right level of return from them. And that was a number of years ago. What we also said at half-year was we were experimenting with a new couple of formats, which is format A and format C we call them, one's around convenience and one's around value. Those trials are going very well and we expect to be able to ramp up our renewal activity going forward on the basis of improved returns from those. Just at the moment, we're thinking that the number for this year will be around about 50 and we expect that to increase next year.
Okay. And the other one, I just wondered, sort of, topic to explore, you talked about customer satisfaction scores remaining broadly steady. Doesn't sound like it's -- doesn't sound like particularly bullish comment, broadly steady, to me, which suggests that maybe a smidge backwards. What can you tell us there? What areas are you working on? And are there any areas of actual concern there?
Yes. I think the numbers weren't stable overall. Obviously, there are some things that went up, some things that went down. Availability is certainly an area that we're very much focused on and also making sure that we're -- I mean, availability particularly in the evenings. So that's something that we're working on as we speak.
So does that mean, Steve, that, that is an area where you sort of not scoring as well as you'd like to?
Well, it's certainly something that we can improve on. So that's certainly something that's happening with the ops team at the moment.
Your next question comes from the line of Tom Kierath from Morgan Stanley.
Just wanted to follow-up on the trading performanceat the back end of the quarter. I think from memory you said that at the first half result that Q3 was in line with the second quarter and, obviously, things are coming a lot better. On our numbers, it looks like the last fall week is up something about 3.7%. Is that just Stikeez, the promotion which kind of aligned with that period? Or did food prices kind of rise throughout the quarter and so you had a bit of a tailwind from that throughout the quarter, which drove the improvement?
Yes, a bit of both, Tom. But mostly the Stikeez.
Yes, okay. And then secondly, there is a bit of, I guess, scuttle bottom on what's happening with the industry sales data or the ABS, I think, is pointing to 5.5% sales growth for the industry for January and February, you guys have grown at 3%. Where do you see the market growing? And do you think you're picking up share, can you maybe just give us a bit of an understanding of how you're looking at the market growth at the moment?
Yes. We're a little bit uncertain about the ABS numbers. I think we are focusing more on some of other measures that are out there at the moment and based on those, our share looks as though it is stable.
So market growing at kind of 3%?
Yes.
Your next question comes from the line of Grant Saligari from Crédit Suisse.
Steven, would you be willing to indicate the impact that private label -- increasing private label sales are having on your inflation or deflation figures? Because I would have thought that mid-shift would have been quite substantial in terms of producing that final deflation results?
Yes, there's probably not something we're going to get into today, but suffice to say that it is -- private label is growing several times the rate of overall growth, mostly on the introduction of new products, by the way, it's not all driven by organically. But it's certainly having an impact on deflation because our overall promotional intensity, it continues to be down year-on-year. So certainly that deflation may impact if private label is the key callout.
So would it be fair to say that branded goods if you're able to look at that on a more constant mixed basis might be an inflation? Would that be a correct assumption?
Look, Grant, if you look at the history of time, it's very rare that branded goods go down in price. Most branded goods do go up in price overtime as in the wholesale price. What you find, what drives the deflation is it has been overtime promotional intensity and that rose to a number of years and then it's being declining for a couple of years as well. So it's not a case that we're seeing inflation for the first time ever in underlying grocery prices, it's more the background of promotional intensity changes and then the increase in private label that drives the overall number.
Your next question comes from the line of Bryan Raymond from Citi.
My question is also around this moderation of growth into the fourth quarter. I just want to understand out a little bit further, particularly around your comment on big basket shoppers and the fact that you had a bit of transaction growth amongst that cohort. Obviously, Stikeez contributed to that. But I just want to understand if that trend has persisted or if there's been any other change in inflation into the fourth quarter, around -- particularly around fresh food, we're going to implement quickly? Just want to understand the components of that moderation in growth in 3Q to 4Q?
Bryan. I mean the main thing here is that we did as we talked about earlier with Tom. We did have a successful Stikeez campaign in the quarter. And what we're sort of calling out is that and we've just gone through Easter, so -- and Easter was in the black for the first time in quite a few years. So it's actually quite difficult to read the underlying numbers at the moment. So we're making more of a forecast than we normally would. And really what we're saying is we don't expect to achieve the Stikeez results in Q4; however, if inflation turns out to be higher than we expect then the result could be different. We're not really calling out anything other than don't forget Stikeez was in Q3 and the market is very competitive.
Right. In terms of the trend for big basket shoppers, would you put that down almost solely to Stikeez or do you think there's some underlying trends in your -- in the stores contributing to that growth in big basket shoppers?
I want to say there's a bit about the Collect's team. There's a bit about flybys. There's also the fact that a number of people have noticed a drop-off in Convenience sales or customers since the plastic bags was withdrawn. Equally, there's a large number of customers who are moving to Conveniences as we've talked about as well, which is an area that clearly we can do better in as well.
Right. Okay. And then just one housekeeping. So just on the online side, just in your portfolio, that 27% growth, is that for food and liquor combined or is that just food?
I'd just say it's a market.
Just in market. And is online penetration in the third quarter materially different to the full year? Or could we use that, so to say, right at the same level for the full year with regard to way up in the third quarter?
Yes. It has gone up a little bit. It's around 3.5% now.
Is that 3.5% in the third quarter or is that an annualized figure?
In third quarter.
Your next question comes from the line of Andrew McLennan from Goldman Sachs.
I won't be live at the momentum questions, but I'll follow on with respect to online and that online penetration rate sounds very strong. You did comment that you are focused more on profitability. I imagine that plays into sort of how you're moving the delivery fees around on a net basis. But can you just talk with a bit more detail as to what's actually gone on there? What's your focus on profitability with respect to online?
Yes, the key changes are around delivery charges and experimenting with those. So it has been pretty successful so far in terms of improving profitability. What we've also noticed is Click and Collect is growing much faster than home shopping as well, which also aids in that regard.
I don't think you called out the Click and Collect growth rate or share. Can you provide a comment on that?
Yes. It's pretty similar to the past growing well north of the average in the quarter. We'll provide a full update at the full year in terms of what the number is, but it continues to outpace the average.
And what's the -- in terms of the delivery fee, what are you sort of averaging there at the moment, is there a rough number you can provide of how it's improved?
We are not -- it's not one-size-fits-all there. It depends on delivery windows, availability and so on and so forth. And we're just trialing a number of different things, which again have been trialed overseas in some places as well quite successfully. Clearly what we want to do and we've mentioned this before is that we want to have a profitable online business. And it's very important that we try and align supply and demand with people who are prepared to cover the costs incurred by home shopping and that will naturally drive more people into Click and Collect. But it will also mean that overtime we can offer a greater number of services, if we've got more money to provide those services. At the moment, many of our delivery windows of peak -- our peak times are fallen to be able to lay on additional services requires additional revenue.
Okay, and just one final one on Convenience. Obviously, that has been a dynamic post "the plastic bag elimination." But do you think that's an industry-wide experience? Or do you feel that you're underperforming your major competitor in terms of capturing that Convenience customer?
Yes, look, we are behind in the Convenience space. We have established a dedicated merchandise team here on Convenience. And obviously, we've been experimenting with Coles local and Coles Express standalone stores as well. So we are rapidly changing in that space, but I think, there's a matter of fact versus the business.
Your next question comes from the line of Ben Gilbert from UBS.
Steve and Leah. Just first one for me. Just interested around the comments around the sort of out of stocks particularly to about evening times. In some sort of some of the work you guys have been doing around service because just maybe some anecdotal, seems like it probably picked up a little bit around weekends and just how you're feeling about your service levels overall at the store level at the moment and where you see those moving looking forward?
Yes. Certainly expect them to improve. We monitor to help Coles during the week and that data is available at fairly regular intervals. So we're able to pick up when our standards are better than others. I think it's fair to say that we are investing or going to be investing more going forward in key times of day to make sure that we have the right availability to meet demand.
Okay. That's good. And just second one for me, which is just around liquor. It's a bit of a funny market at the moment. I was just interested if you could talk to some of the trends out there. Because it seems like there's probably a little bit of shift away from big boxes because, I think, sort of led by you guys have been lot more competitive at sort of the smaller formats, maybe there's a bit of trading down and if you think that there's sort of some signs of consumer softening there and trading down to private label and I think there's probably a bit of a shift more to say some of the Spirits category away from wine. If you could just talk through some of the dynamics that is happening in that market and how that sort of fades into our thinking and positioning into liquor base looking forward?
Well, you just provided a perfect summary. Well, I don't think I've got a lot to add other than that it was a bit of a strange quarter, in that First Choice was actually our best performer in the quarter and there's been a lot of work gone on, I have to say from a low base. But there's a fair bit of work going on there to improve the underlying business, but also the new First Choice liquor markets that are rolling out are performing pretty well. As far as other things I'd say is that, obviously, the weather was for the most part, very, very good in the quarter. And that will have driven certain categories we did notice that versus pre-Christmas that the beer category certainly improved a little bit. But the overall shift is towards Spirits as you've articulated and towards Convenience.
And just on the First Choice, could you talk to a couple of things that you think are really that would explain the performance of that pickup?
Yes. I mean, obviously pricing is always critical but in terms of -- have you been to a First Choice liquor market?
I have been to one. I must admit, I haven't been that regularly from a personal perspective. Because...
Okay, all right, well, there's quite a few of them now. So I'd encourage you to have a look, I mean they are a very different experience to the old First Choices and what we've tried to do is edit the range, slightly highlight the areas of interest like Spirits, but you definitely don't have any doubt that you're leaving a good value establishment when you're on the way out the door. So it is a much better experience than it was, however, overall we expect that the key focus will be around Liquor Land.
Your next question comes from the line of Scott Ryall from Rimor Equity Research.
Steven, I wanted to just pick up on couple of comments you made in your prepared remarks about the Fresh Stikeez promotional campaign. I get that high customer engagement like most people on this call, I'm sure, lots of our kids annoy us to try and get this sort of stuff and that's what drives it. But you made a comment about fresh categories in particular and highlighting some of the fresh categories that you have and that the promotion was effective in driving that. I'd like you to just discuss that in a little bit more detail and perhaps just talk to the fact on store continuing a trend you've seen fresh grow at a faster rate than overall supermarkets and could you just talk to that end. How much of that is driven by price inflation? That would be great. And that's my only question.
Okay. Yes, fresh across the business and I might say all categories, fresh is outstripping grocery. That's not unusual. Obviously with Stikeez, we put out the Rainbow Challenge and we certainly know anecdotally we don't have firm numbers on how many kids participate but the anecdotal evidence is that a lot of the kids got involved with the Rainbow Challenge. And that's a lot of stuff that they wouldn't ordinarily eat, most notably eggplants and things that wouldn't ordinarily be on their menus. So I think from our point of view, we regarded it as a successful campaign.
And in terms of how much of fresh outperforming supermarket is driven by price inflation?
Are you talking about fresh being produce or fresh overall including [indiscernible].
Well. I'd like to keep it as like-for-like in all your commentaries as you can. Obviously, produce is where the -- and meat is where the inflation are likely to be seen. But you comment however you want.
We're seeing inflation as we think we've mentioned in the release, we're seeing inflation in most of the fresh farming categories whether that be bakery and meat, produce. It's probably been more prolific in the produce category. And really what we've been trying to do is to minimize the impact that, that has for customers. So whilst we're seeing some items go up in price particularly things like apples, we're currently seeing some very low prices at the moment on bananas. So we're trying to sort of highlight the products that are the best value for our customers at the moment.
That's fine but when you talk about fresh outperforming overall supermarkets, what, I guess, I'm asking is, can your price inflation adjust your comment and if you weren't saying price inflation, would you still say fresh categories are outperforming overall supermarket? That's really what I'm getting to.
Yes, there's no question that people are still buying more fresh food as a trend.
There are no further -- yes, your next question comes from the line of Vanessa Jeffries of Macquarie.
Just wondered if you could talk a little bit more about why you think Convenience is still underperforming and what you really need to change there?
Well, I think the some of -- most of the elements of Convenience are quite strategic in nature, which is that, obviously, you need a wide range of product and you need to think about where those products are located in your store. You need to make sure that people are getting in and out of the checkouts quickly and so on so forth. So we're working on all of those elements as we speak but it isn't a case of turning a dial and certainly you get in a more Convenience sales. We are probably a some period of time behind competition of this trend and it will take us a period of time to get back on an even keel. But it's not something I was expecting to be reporting on today. Hopefully, something we can give you more information on in June.
Okay, great. And do have any more figures that you could provide on private label breakdown would you say over 30% now?
Well, I say it's over 30%?
Yes.
I wouldn't say it's over 30., I said it's very close to 30%.
There are no further question at this time. I would now like to hand the conference back to today's presenter, Mr. Steven Cain, please continue.
Okay, thank you very much for your time everybody. And look forward to catching up soon. Bye now.
Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may now all disconnect.