Coles Group (COL) - Gaining ground

Coles Group Limited operates as a retailer via its eponymous supermarkets and liquor stores, including brands such as Liquorland, FirstChoice, and Vintage Cellars. The company also sells its own-branded insurance services and operates the ‘fly-buys’ loyalty scheme.

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Coles provided a solid update for the September quarter. The company demonstrated strong execution with healthy first-quarter FY25 sales and clear cost discipline. Secondly, tightly managed capital expenditure (capex)should reward shareholders with healthy free cash flow (FCF) and dividends.

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Beyond FY25, Coles has several earnings drivers in FY26,underpinning our confidence in earnings growth. The risk-reward is attractive, with Coles now trading at a 16% discount to arch-rival Woolworths (WOW).

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Coles is navigating a challenging period for Australian supermarkets, managing government and regulatory scrutiny, deflation, and cost pressures effectively. The group’s strategy to focus on its core food business while maintaining cost control is proving successful. Coles has not seen significant changes in consumer behaviour around promotions or promotional funding, and its promotional strategy is improving consumer value perceptions.

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Coles should have considerable savings to invest for growth in FY26, supporting profit delivery and market share gains. We have lowered our food gross margin forecasts for FY25 and raised our depreciation and amortisation estimates, which has resulted in an approximately 5% reduction in our full-year EPS forecast. We have moved our recommendation to Accumulate from Hold and our price target has increased to $19.50 from $19.00.

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