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Coles MD confident of second-half lift

Coles managing director John Durkan is confident that the supermarket chain is positioned for moderate earnings growth in the second-half, following a rebound in comparable sales in the December quarter.

Speaking to investors and analysts on Wednesday afternoon, Durkan said that Coles’ underlying comps will incrementally improve in the third and fourth quarters, following a rebound in comp growth from .3 per cent in Q1 to 1.4 per cent in Wesfarmers’ second quarter.

“Sales momentum is expected to broadly continue at the same level of growth as Q2,” Durkan said, who added that following quarters are expected to incrementally improve.

“The business is strengthening as we move forward, so I see our business improving over the next half.”

Continued investment in prices and service drove an 11 per cent decline in Coles’ earnings before interest and tax (EBIT) to $790 million for the six-months ended 31 December, but this was better than market expectations as the chain works to catch-up with a resurgent Woolworths.

Coles stepped up its price investment slightly year-on-year in the first-half, with deflation .1 per cent over 1H17.

This helped to drive the supermarket’s strongest transaction growth in six quarters, which Durkan said was particularly pleasing as he was quizzed by analysts over the strength of Coles’ underlying business moving into the second-half.

“Our investments over the past half have been a continuation of our strategy…we’re seeing it come to fruition, sales momentum continued to increase over the period,” he said.

Questioned over whether he was overplaying the strength of Coles’ rebound, Durkan outlined his belief that the business is in good shape, with second-quarter growth broadly in line with the market.

“The market has changed for the foreseeable future, we’ve got a more intensive market and a more competitive market than we’ve ever had, and I think you’ll see a more moderate level of comps from the rest of the market,” he said.

Last month UBS downgraded its 2018-19 profit forecasts for Coles after a survey of suppliers found that the business was performing poorly against a variety of key metrics, such as culture and in-store execution.

Durkan assured investors that “it’s all going according to our plan” at Coles and that customer feedback metrics had improved over the half.

“[Customers] are happy with the fresh food range we’ve got, their happy with the availability, and pricing perception has improved,” Durkan said.

Although he conceded that Coles has a “long way to go” and that there remains a “large number of customers” that are dissatisfied.

Citi analyst Bryan Raymond said better than expected margins were a positive for Coles, but there would also be an upside for competitor Woolworths, who reports its half-year result later this week.

“While the grocery result was ahead of our expectations, we also see upside risk to consensus expectations for Woolworths supermarkets,” he said.

Second-half deflation also remains an unknown quantity for Coles; after recording a 1.6 per cent decline in prices in the first-half Durkan warned that Q3 deflation is looking higher than Q2, particularly in fresh-food.

Durkan said that inflation in dairy, beef and lamb have ticked up in the New Year but produce remains more deflated than this time last year.

He added that it was difficult to judge what deflation would look like in the fourth quarter of fiscal 18.

Opportunities – fresh and digital

Durkan maintained his view that fresh is Coles’ largest opportunity in terms of the headroom available for growth and provided an update on Coles’ efforts to improve its supply chain processes to reduce costs and bolster freshness.

Coles has invested disproportionately in training staff within the fresh-food category over the last half and is working on a one-touch supply chain initiative that will improve availability and reduce costs.

At the same time the business is investing heavily in digital, having reported double-digit online growth for the first-half.

Durkan said click-and-collect is now rolled out to 280 sites across the country, with over 800 anticipated to be completed by the end of fiscal 18, alongside partnerships with companies like Airtasker to make shopping more convenient for customers.

This mirrors competitor Woolworth’s increasing focus on new channels, including in-store pickup, click and collect and drive-through.

Coles parent Wesfarmers outlined an increasing focus on data and analytics as a key priority in the second-half, with managing director Robb Scott unveiling the creation of a centre of excellence in analytics to improve Wesfarmers’ skills and tech solutions across the business.

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