Coles HY’s Australian Profitability Skyrockets as Cost Reductions Balance Out Supply Problems

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Coles Group Ltd, Australia’s second-largest grocer, reported that its first-half profit exceeded analysts’ expectations as pandemic-induced cost savings outweighed inflation. 

Despite the positive news, Coles cautioned investors that higher wages and energy bills are causing expenses to swell, consequently sending shares lower.

After experiencing a surge in sales due to the COVID-19 lockdowns, Coles and its main competitor Woolworths Group Ltd have suffered from an altered economic landscape brought on by Russia’s invasion of Ukraine, which has led to increased electricity costs as well as labour shortages driving up wages.

Natural disasters, crop-destroying storms, and floods that obstruct freight roads and railways have exacerbated the already-difficult situation for two supermarket chains that collectively bring in two-thirds of all grocery sales in the country.

Coles reported that profit from operations had grown by 11.4% to A$616 million ($424.61 million) for the six months until December, surpassing analyst expectations.

Nevertheless, this growth was aided by a sharp decrease in COVID-19-related costs from the same period one year prior, as noted by the company. Sales from continuing operations rose 3.9%, lagging behind inflation in that particular time frame and indicating people were limiting their spending habits, according to analysts.

“It’s a very complex set of movements, and it’s somewhat difficult to predict where it goes,” said Leah Weckert, a Coles executive who the company said would be its new CEO from May.

We are expecting cost pressures to remain, but we are expecting to see some moderation,” Weckert added.

The company reported that shopping volume had ascended to a “moderately positive” state in January with no financial projections. 

Coles stocks decreased 1.5% during afternoon trading as analysts raised issues about multiple costs headwinds; conversely, the broader market dipped by 0.2%.

The cost growth was probably a bit faster than people had forecast. Freight costs, labour in stores: it’s still hard to get people at the moment, so you’re probably seeing the impacts of that coming through,” said Barrenjoey analyst Tom Kierath.

Coles raised its interim dividend to 36.0 Australian cents per share, a 9% increase from the previous year’s dividends.

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