EL&C Baillieu Research 2017 March March 2020 2020

Coles Group COL

Company Snapshot Company Snapshot is designed to provide Profile: Coles (COL) is a leading retailer headquartered in , with information on a stock’s core operations, products including fresh food, household goods, liquor, fuel and financial summarise its key financial information, and services. As at June 2019, Coles employed c.114,000 staff and operated c.2,450 present its earnings and dividend track record. retail outlets. ~80% of Australians live within a 10-minute drive of a Coles store. It does not contain an investment recommendation, valuation or price target. History: In 1914, Coles opened its first variety store in Collingwood, . The first Coles supermarket was opened in 1960 in Victoria. Coles merged with Myer Emporium in 1985 to form Coles Myer Limited. Subsequently, Coles Myer sold The information in this snapshot is not Myer to Newbridge Capital and The Myer Family Company in 2006. In 2007, Coles intended to constitute personal advice and is Group (including Kmart, Target and ) was acquired by general in nature. There has been no (ASX: WES). WES demerged Coles, while retaining a 15% stake, in November 2018. consideration of the investment objectives, financial situation or particular needs of any Earnings composition: In FY19, reported $31bn in revenue particular person or entity, and the recipient and EBIT of $1,191m (89% of group EBIT). The Liquor division generated $3.2bn in of this information must not rely on the revenue and $133m in EBIT (10%). The division delivered $4.0bn veracity of the information in making any and $46m (3%) of group revenue and EBIT respectively. investment decisions. Most recent result – 1H20: EBIT (Earnings Before Interest and Tax) increased 0.4%

on the prior corresponding period (pcp) to $725m. Supermarkets sales increased

3.3% on the pcp to $16.6bn, with growth in both the basket size and transaction size. Supermarkets EBIT was up 5.7% on the pcp to $637m; benefitting from the lack of incremental costs experienced in the prior period. Liquor revenue increased 3.3% on the pcp to $1,691m. Liquor EBIT declined 9.9% during the period, as increased promotional activity impacted margins. As expected by COL, Express EBIT declined from $51m to $4m under the New Alliance Agreement announced in March 2019. Net profit after tax from continuing operations increased 1.7% on the pcp to $498m. A 30-cent interim dividend was declared. Company outlook: Early 3Q20 supermarkets sales have been consistent with 2Q20. Liquor is expected to be impacted in 2H20 by range reviews and clearance activity, as well as volume impacts from bushfires. Important dates: Ex-dividend date was 27 February 2020. Payment date is 27 March 2020. 3Q20 sales results scheduled for 29 April 2020. FY20 results are scheduled for 18 August 2020 and COL’s AGM is scheduled for 13 November 2020.

Fig.1: COL – earnings per share (cents) Fig.2: COL – dividend (cents)

40 36 35

30 12 25

20

15 30 24 10

5

0 FY19 1H20 Interim dividend Final dividend Special dividend

Source: Company reports. Continuing operations. COL was part of Wesfarmers Limited Source: Company reports. COL was part of Wesfarmers Limited (ASX: WES) in FY18 and (ASX: WES) in FY18 and as such, payout ratio not available for FY18. as such, dividend not available for FY18.

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Company snapshot Sales revenue and EBIT

Fig.3: COL – sales revenue from continuing operations (A$bn) Fig.4: COL – EBIT from continuing operations (A$m)

Source: Company reports Source: Company reports

Divisional description and revenue model

• Supermarkets (89% FY19 EBIT): Includes 823 stores (as at 1H20), Coles online For COL, the most relevant and Coles financial services. Coles online offers a choice of home delivery as measure of earnings is EBIT, well as pickup from over 1,000 Click&Collect locations. Coles Financial services defined as Earnings Before offers credit cards in partnership with Citigroup, and home, car and landlord Interest and Tax insurance in partnership with Insurance Group (ASX: IAG).

• Liquor (10%): Coles Liquor is a liquor retailer with brands such as , and . It operates 917 liquor stores. COL has an interest in Venue Co Pty Ltd, where it earns profits from retail liquor stores in QLD, SA and WA attached to Spirit Hotels’ venues.

• Express (3%): Operates 713 Coles Express petrol stations and convenience outlets. Coles Express sells Shell fuels and a range of products such as groceries, food and drinks. COL pays Viva Energy (ASX: VEA) for site lease and licence fees as well as a royalty on shop sales. VEA pays COL a commission based on fuels volumes. COL sets in-store prices and operates the Coles Express stores, whilst VEA sets the fuel pump price and receives fuel margins. COL is responsible for employees and site running costs. VEA supplies Shell fuel, lubricants and LPG.

• Other (-2%): Coles owns a 50% stake in , which is a loyalty program where members can earn and redeem points from the majority of WES’ and COL’s retail businesses and other partners. This segment also includes corporate costs.

Fig.5: COL – EBIT by division (FY19) Fig.6: COL – operating margins

Source: Company reports Source: Company reports.

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Operational metrics

Fig.7: COL – total store network Fig.8: COL – comparable sales growth

Source: Company reports Source: Company reports. Wesfarmers reports.

Profitability

Fig.9: COL – NPAT from continuing operations (A$m) Fig.10: COL – return on equity from continuing operations

Source: Company reports Source: Company reports.

Balance Sheet

Fig.11: COL – net debt (A$m) Fig.12: COL – gearing ratio (net debt / net debt + equity)

Source: Company reports Source: Company reports

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Share price and valuation

Fig.13: COL – share price (A$) 18.0

17.0

16.0

15.0

14.0

13.0

12.0

11.0

10.0 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20

Source: Bloomberg

Fig.14: COL – one-year forward price to earnings ratio (consensus estimates) 26.0

24.0

22.0

20.0

18.0

16.0

14.0 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20

1 year forward price to earnings ratio (x) average

Source: Bloomberg

Fig.15: COL – one-year forward dividend yield (consensus estimates) 5.0

4.5

4.0

3.5

3.0 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 1 year forward dividend yield average

Source: Bloomberg

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