Where will Coles shares be in 5 years?

Coles Group Ltd (ASX? COL) shares haven’t done that much in 2022 compared to many other ASX shares which have fallen significantly. The supermarket giant’s share price is currently down 6% in the year to date.

However, I don’t think a business should be judged on short-term price movements. Instead, I think a company’s long-term plan needs to be evaluated.

Coles’ strategy

The business points to consistent growth throughout economic cycles with an average compound annual growth rate (CAGR) of 4.8% and liquor retailing CAGR of 7% over the last two decades.

The company has a number of goals, hopefully, all of which can help Coles shares in the long run.

Coles wants to be Australia’s most sustainable supermarket group. It’s working on transitioning to renewable energy by FY25. It’s also aiming for 100% recyclable, reuseable, or compostable own-brand packaging in Australia by 2025.

Another area of focus is to “win in food and drink”, with a strong omnichannel offering. It’s investing in a “unified customer experience” through website enhancements and increased investment with e-commerce partner Ocado, targeting an FY24 launch. Coles is also aiming for net new space growth of around 1.5% per annum.

The business wants to offer great value exclusive brands, as well as be a destination for health and convenience. It’s looking to expand its ‘exclusive to Coles’ range to around 40% of sales. Coles also wants to improve its ‘Coles Kitchen’ and ‘I’m free from’ brands.

Perhaps the most important element of the longer-term plan is ‘smarter selling’. Indeed, this could have a major impact on Coles shares. The company wants to achieve a long-term structural cost advantage through programs including data, automation, and technology partnerships.

Smarter selling

It’s working on further automating its supply chain and operations through German logistics company Witron and Ocado enhancements. Coles wants to accelerate self-service transformation in-store and invest further in technology, artificial intelligence (AI), and data.

The company says that it’s on track to deliver cumulative smarter selling benefits of $1 billion by the end of FY23 under its four-year program. In the first quarter of FY23, it opened three new supermarkets, taking the total network to 838, while also opening seven liquor stores.

Strategies include front-of-store loss prevention, ‘dynamic markdowns’, e-commerce van optimisation, and energy savings.

It’s spending a total of around $1.4 billion on the Witron and Ocado transformation projects. It’s a big spend but, hopefully, it helps Coles shares in the long term.

The company says the $1.04 billion spent on Witron is expected to deliver: safer working environments with improved service at a lower cost, reduced lead time to deliver better availability of stock, and a doubling of the volume on half the footprint with around two-thirds of the operating costs of a standard site. There are two warehouses being built – the one in Queensland is expected to be completed in the third quarter of FY23, while the NSW one is expected to be completed in the third quarter of FY24.

With Ocado, Coles hopes to achieve a seamless digital customer experience, improved product availability and freshness, greater product range, and increased network capacity.

Coles share price valuation

Looking ahead to FY24, according to Commsec, Coles shares are valued at under 21 times FY24’s estimated earnings and could pay an annual dividend per share of 66 cents per share, which is a grossed-up dividend yield of 5.6%.

The post Where will Coles shares be in 5 years? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Coles Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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