Why did the Coles share price have such a rough trot in August?

The Coles Group Ltd (ASX: COL) share price suffered a 6% fall during August.

However, between 22 August and the end of the month, it actually dropped by almost 10%.

It seems the supermarket business revealed its FY22 result and then some investor support disappeared.

Results are often the best time for investors to get a real insight into the performance of a business, its plans for the future, and what management thinks about its outlook.

It’s certainly an interesting time for supermarket companies like Coles amid the current inflationary environment. Suppliers want to pass on price increases so they can pay for their own elevated costs. But how much will Coles allow the price on the shelf to go up? And how will customers react to the higher prices?

Investors got some information from the company’s FY22 report.

FY22 earnings recap

Coles said that its total sales increased by 2% to $39.4 billion. Within that, the supermarket division saw 2.2% sales growth to $34.6 billion, liquor sales went up 2.5% to $3.6 billion, and Coles Express fell 5% to $1.13 billion.

The company reported earnings before interest and tax (EBIT) fell 0.2% to $1.87 billion and net profit after tax (NPAT) rose 4.3% to $1.05 billion.

Coles saw supermarket sales and Express revenue ramp up in the fourth quarter, with comparable sales growth of 3.7% and 1.1%, respectively.

In the second half of FY22, Coles supermarkets saw inflation of 3.8% which Coles put down to supplier cost price increases.

However, Coles also experienced higher costs. The cost of doing business (CODB) as a percentage of sales increased by 50 basis points to 21.4% due to COVID costs (approximately $160 million in FY22 compared to $90 million in FY21), higher fuel costs, and underlying cost inflation.

Outlook for the Coles share price

As I alluded to before, the outlook can have a sizeable impact on the Coles share.

Coles said that in FY23, its supermarket sales would be cycling against COVID lockdowns in the first half of FY22 (in NSW, the ACT, and Victoria), and price inflation in the second half of FY22.

It has seen “further cost price inflation” in fresh produce because of recent flooding, in bakery due to wheat commodity prices, and in packaged groceries due to various supply chain cost increases, including wages, packaging, raw ingredients, and freight.

In its liquor division, sales growth is also expected to be “impacted” by the cycling of COVID-19 lockdowns in the first half of FY22.

Coles Express weekly fuel volumes and sales are expected to benefit from increased mobility.

The ASX share noted that with increasing inflation and rising interest rates placing pressure on many households, it will continue to focus on delivering “trusted value”. But, it is seeing inflationary pressures on its own cost base in the form of higher wages, rent, fuel, as well as supply chain and capital costs.

Coles said its ‘smarter selling’ program is on track to deliver cumulative benefits under its four-year program of $1 billion in FY23, which is helping partly mitigate some of the underlying cost pressures.

Is the Coles share price a buy?

The broker Morgans rates Coles as a buy, with a price target of $20. That implies a possible rise of more than 10%. Morgans likes the defensive nature of the business but noted that its profit margin fell.

Citi also rates it as a buy, with a price target of $20.10. That implies a possible rise of around 15%. The broker notes that it has been growing market share, but decided to moderately reduce its profit forecast over the next couple of years.

The post Why did the Coles share price have such a rough trot in August? appeared first on The Motley Fool Australia.

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Citigroup is an advertising partner of The Ascent, a Motley Fool company. 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 COLESGROUP DEF SET. 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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