Australia’s second largest food and liquor retailer faces some big challenges, warning investors that it would be at least a year before Coles Group Ltd [ASX:COL] returns to profit.
At the time of writing, Coles share price is trading at $11.49 apiece, down a further 5.05% from yesterday’s trading.
As with any established company, big announcements can often carry knock-on effects to its share value. We have seen this will Coles’ demerger costs.
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Coles share price hurt by demerger costs
Coles’ new Chief Executive, Steven Cain, gave an honest assessment of its outlook for 2019, stating that costs where rising faster than sales — something no business ever wants to hear.
And if you combine this with fast-changing consumer shopping habits, shareholders have grounds to be a little concerned with Coles’ losing market share.
On Tuesday, in a bid to get ahead of the weaker than expected first half results, Mr Cain told shareholders, as reported by the Australian Financial Review (AFR):
‘It’s time to reset the Coles business to achieve sustainable long-term growth for our shareholders, a strategic refresh to ensure we appropriately address the headwinds facing the company,” Mr Cain said on Tuesday after unveiling a slightly weaker-than-expected first-half result, the first since its $20 billion demerger from Wesfarmers.’
‘What we’re trying to do is get to a situation in the medium to long term where we restore growth,’ he added.
‘That’s not going to happen overnight,’ Mr Cain said.
As AFR also reports, between 2009 and 2016, Coles’ earnings rose a massive 125%, but in the last two years (2017/18) that number has since fallen by 19%.
This year, analysts are predicting a further 11% to come off earnings before interest and tax, to $1.25 billion this year.
And yes, that is an awful lot of money to lose over a year, though it’s not the end of the world for a company like Coles. At some point or another, momentum has to slow, and an 11–20% loss on a 125% gain, to a billion-dollar company, just means strategy changes are needed.
Something Coles is already doing.
Coles’ 2019 outlook seeks new strategy
Margin headwinds have plagued grocery retailers globally, as online grocery shopping grows.
Coles might be playing catch up, after the underinvestment in stores, systems and supply chain, while under Wesfarmers.
But, according to Mr Cain, it’s not going to be trigger the profit resets seen at Woolworths with its 37% drop between 2016 and 2018.
According to Citigroup analyst Bryan Raymond, Coles’ share price is likely to trade weak well into mid-June, until Coles reveals its new strategy.
But shareholders will have to hold strength, because there’s really little point projecting in an ever-evolving market.
For Money Morning
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