Coles Group Limited (COL) Earnings Call Transcript

Thank you for standing by, and welcome to the Coles Group Q1 2017 Financial Results Call. [Operator Instructions] I would now like to hand the conference over to Leah Weckert, Chief Executive Officer. Please go ahead.

Good morning, everyone, and welcome to Cole's first quarter sales results for the 2027 financial year. Before I begin, I would like to acknowledge the traditional custodians of the land on which we meet today, the Wurundjeri peoples of the Kulin nation. We acknowledge their strength and resilience and pay our respects to their elders past and print. I am joined in the room today by Charlie Elias, our CFO; Matin Swindells, our Chief Operations and Supply Chain Officer; Anna Kraft, our Chief Commercial and Sustainability Officer; Michael Cooney, our Chief Customer Experience Officer; and Claire Lauber, our Chief Executive, Liquor. I'll start with a few comments on the portion before we move into questions. We delivered supermarket sales growth of 3.6% in the first quarter, consistent with the growth achieved in the fourth quarter of FY '26. This represents a 2-year growth rate of 10.7% ex tobacco. This was achieved in a highly competitive market with customers continuing to manage cost of living cures and shopping more deliberately across retailers and channels. Against this backdrop, during the quarter, we increased our investment in Coal simply and our everyday Valley ranges and customers continue to make greater use of our promotions. Engagement with labor also strengthened with swap rates increasing and the value of points retained up 16%. We also continue to see strong momentum in some areas of the business where we have been investing for growth. E-commerce was a with sales increasing 2.9% and and penetration reaching 15.7%, led by our CFC for field and immediacy channel. Our exclusivity pole portfolio also continued to perform well. growing ahead of total supermarket sales. We launched more than 80 new own brand products during the quarter, and Coles Fines remained our strongest performing tier with sales growth of 13.3%. As discussed at the full year, we are continuing to invest in our store network and customer experience. We opened 8 new supermarkets during the quarter, which is almost as many net new supermarkets as we open throughout the entire year in FY '26. We also completed 7 renewals and are expanding our online capacity and have commenced the rollout of electronic shelf labels. In liquor, sales declined by 1.3%. Our convenience portfolio remained in positive growth, and we saw improving trends across our warehouse stores, which is encouraging. Customer metrics also improved with NPS reaching an all-time high reflecting continued improvement in the in-store and online experience. Overall, there are areas of good momentum, but we recognize that in this competitive and value-focused environment, our sales momentum is not where we would like it to be. And we are taking actions to sharpen our offer for customers and improve momentum as we come into the all-important Christmas trading period. We are stepping up our investment in value where it matters most to our customers and making that value clearer and noticeable. As an example, last week, we relaunched our everyday price program where customers can count on 6 months of price certainty, and we are already seeing encouraging early signs from this. I'm sure you have also noted from our release this morning that as a result of the targeted investments we are choosing to make in our customer offer, sales momentum, which is not in line with where we would want it to be. Together with the higher fuel costs we have seen over the last 2 months. We are now expecting supermarket EBIT for the first half to be in line with first half of FY '26, noting that we are cycling EBIT growth of 14.6% last year. In liquor, the sales revenue declined in the early part of the second quarter was broadly in line with Q1. We are encouraged by momentum in our convenience format and the early customer response to our integrated food and drink offer while remaining focused on improving overall performance. We know our customers are under pressure, and we are confident that we have a strong plan in place to build their trust over this period for the long-term benefit of the business. And with that, let's move into your questions.

[Operator Instructions] The first question today comes from Peter Marks from Goldman Sachs.

I'm just curious, could you give us a bit more color on what's happened in October -- how much has that slowed? And I guess, are you thinking about the second quarter? Because I think your cons about to get materially like EDR into November, December.

Thanks for the question, Peter. Well, as we said in the outlook, the sales rates, as we've gone through October, it has moderated versus Q1. But I would describe it as remaining resilient. I mean we're not in a situation here where it's gone down into the too. And so it is still very resilient. And we've got a strong plan in place as we head into the back end of the year, which is giving us some cautious optimism that we will be able to get that sales momentum moving up. I think what we saw in October is that we do have a consumer that is very cautious. We did see sentiment impacted by the interest rate rise that came through. And so we know they are continuing to manage their budgets very closely. They're seeking out more value buying on specials using our digital tools to help them to identify where the cheapest price is. And we are seeing them engaging more strongly with loyalty programs. So flybuys has seen some real step-ups in terms of site rates and higher opening of e-mail office. As we think about heading into the back end of the year, there's really 3 big things that we're focused on to give us that optimism around the improvement in the sales momentum. I think the first 1 would be that we are stepping up investment in value, but alongside that also strengthening the communications that we have around value in store. So we currently have got about 4,000 products on every day, and we did relaunch that program last week, which has meant there's a new adding market. We've got more point-of-sale around the store, and we're more clearly calling out now the products that are on every day. And alongside that, we've introduced a new mechanic, which is lower everyday prices, which is actually a price drop and then a commitment to hold it at that new price for at least 6 months. And then the second big area that we're really focused on is making sure that we land these Christmas customer moments as we head into Christmas. So if you go into our stores at the moment, you will see that Halloween is very much alive in store. There's a lot of fun around things like the Pumpkins, but there's also a great value to be had in areas like half price share packs and the like. And then we've got Black Friday, Cyber Monday ahead of us. We've also got then Christmas, and we have got our biggest business range that we've rolled out this year, including 200 products under $10. And then I think the third area that we're really focused on as we come into the back end of the year is relentlessly focusing in on execution. And as part of that focus on availability and making sure that the investments that we've made in things like the ADCs and store tech is really getting us into the best shape that we can for the Christmas trading period.

The next question comes from Tom Kierath from Barrenjoey.

Just a question on the price investment and how to think about that annualizing through the second half. Is the way to think about I guess, the change in outlook, the price investment is all in the second quarter. In other words, there wasn't much in the first quarter. And then effectively, we should kind of double that investment for the second half. Is that reasonable to think of it like that way for the -- on the price investment side?

Tom, for the question, it's Charlie e here. Look, from my perspective, look, what we've given you today is really a perspective on the strong plan that we've put in place in terms of value and investment and communicating that value as Leah outlined, earlier in relation to the first half. We have not given any guidance in relation to the second half. We believe we've got some strong plans in place through this strong -- this festive season and the like. So we're not -- we haven't set a to give you second half guidance in any form in that regard.

So can I clarify then that the price investment is all related to the second quarter and there wasn't any incremental investment in the first quarter?

Again, we are taking action on value both in the second quarter. We have obviously had value investment in the first quarter as well, but we are taking action in the second quarter including not only just the actual value investment, but how we are communicating that value through the mechanics that Leah has outlined earlier.

And Tom, I think it would be fair to say that every year, we put a plan in place around what value investment would be. And coming into quarter 1, we were taking actions in line with that plan. So for example, we made some investments into the coal. Simply range to sharpen that proposition at the value end of the range. But what we're indicating now is that we're just going to be doubling down in a few areas as we come into the back end of the year really to get that sales momentum going in an environment which is very competitive at the moment. .

The next question comes from Bryan Raymond from JPMorgan.

Just wanted to sort of reflect on maybe the sort of postals period, so the 5-week exit run rate for you guys. And then October. I know it's a bit rough, but on my estimates, I'm sort of estimating you guys are about 250 basis points below boys on sales momentum at the moment. I just want to understand the sort of rationale or also the rationale of the drivers of that and how you're addressing it? You're obviously calling out value, which is important, but I don't necessarily think your prices necessarily how to wacko. So I just wanted to understand if you think there's an execution issue, if there's a problem either in in-store or online or just really diagnosing that underperformance of late. It's only been a few months, I understand, but I'm just trying to work out going forward, if that's something is addressable without major price investment.

Yes. Thanks for the question, Bryan. So I think, first of all, if we just take a step back, I think it is worth noting that we've had very consistent sales growth now for many periods on periods. And actually, when you take Q1, we're in a 2-year growth rate of 10.7%, which is very strong. And so there definitely is a factor which is playing in here, which we have had strong performance for an extended period of time now, and we're still delivering consistent growth over the top of that. But the market is very competitive. And I think it would be fair to say, during this period, we have been transitioning away from downtown. And that has probably -- well, it has limited the amount of communication that we've been able to do around value in store, as I said, we relaunched every day last week that is giving us a new mechanism and a new set of assets that we're able to communicate in store. And if you go in and see that now, you really are seeing that very prevalent in the store. We're much more of a in calling out everyday products on the shelf. And we've introduced things like value based, very strong ends around every day as well. So I think having that in place now gives us a lot more confidence around voice that we have around value. And obviously, that's very important as we come into the back of the year.

And just the high low program, like that's the other important piece of it. Is there any change there? I've heard sort of multi-buys might be changing? Is there anything going on there that might be contributing to the other performance?

Well, actually, during Q1, we saw promo contribution step up a bit. So as we were transitioning away from downtown that promo contribution played a larger role in how customers were accessing value in the store. We would expect that probably starts to normalize now as we see more activity in the everyday space as we go forward. But I wouldn't be calling promotes out as something that we're concerned about. .

The next question comes from Shaun Cousins from UBS.

Maybe just further on the value perception sort of issues there. with your investments, do you believe that your -- given that you know your price is probably better than we can ever estimate, do you believe that you need to drop prices to be lower than Woolworths are? Or where are you now relative to Woolworths? And is it really more meeting the market or you want to establish a lower price point? And how much of it do you think your value issues are price reality relative to a poor communication and a price perception sort of issue there, please?

So I think I would describe the actions that we're taking today as -- we are taking a targeted set of actions here to get sales momentum building again. And we have moved early on making the decision that we need to do that. As I said, the market is competitive. And as we have transitioned out of downtown, there has been some pressure on prior indices. But it's not something that we're calling out as a problem here. What we are saying is we're going to make some targeted investments in the right places as we come into Christmas because we know that consumers are very value conscious. It's likely they're going to be even more value-conscious as we head into Christmas. And so doubling down on value at the moment makes good sense for attracting them into the store because they are checking prices, week in, week out. And so making sure that we've got the right pricing and the right promotions on lines that we know are going to be set as big baskets as we come into Christmas is really key.

Sorry, sorry, Leah, that suggests it's more of a -- you need to sort of communicate that there's some select price investments you're making, but it's more of a, you have the wrong mechanism with downtown and every day will help you need to communicate it better. Is that the right way to read it as opposed to we just need to drop prices dramatically. It's more around -- if you had to weight it, it would be more in how it is communicated and message to the consumer.

Yes. I think that's right, Shaun. It's a targeted set of investments and that it's stepping up the communications that we are doing because we now have confidence behind the set of mechanics that we can communicate to consumers and that we're confident around sort of the compliance guardrails that we have around those. .

The next question comes from Craig Wolffwood from MST Marquee.

On Lane. Can I just get some perspective on the dynamics that are leading to softer sales trends? I mean items, is it items in the basket or number of transactions? And also, any comments on different categories within the store fresh every day in pulse of the categories are performing?

Yes, I'd probably actually say the biggest differential that we're seeing at the moment is probably from a channel perspective. So the online growth for us during the quarter was very strong. And I maybe get Michael to comment a little bit on that. I think where we -- I would say we're not happy with momentum at the moment using the bricks-and-mortar sales. And as I've just talked through, we've made some significant changes in terms of how we're communicating value in the store across the board in the brick-and-mortar space that we've been very pleased with the early response that we've seen to that. Michael, did you want to talk a little bit about line?

Sure. Thanks, Leah. Well, as lead me cons growth for the quarter was very strong. I think what's particularly pleased in that is that the growth is being led by Bob and CFCs, which are to differentiated positions in the market, and we think they're giving us a clear growth advantage at the moment. I think the other thing that I would add as we continue to grow in sales, we're continuing to improve the profitability of the e-commerce business as well, which means our profits growing ahead of where our sales is.

And maybe just to round that, Craig, I think in terms of customers, customers we've been seeing them put more retailers into their repertoire every week. I think we saw that sort of come off a little bit as we came into Christmas last year. But this year, ever since the start of the Middle East conflict, we've seen that as a really sort of prevalent consumer behavior. And so we are continuing to see really good levels of customer count coming through the stores, but we're seeing a lot more splitting of baskets. And so with those targeted investments that we're looking to put in place, that's really about making sure that those high-volume SKUs that really form the core of the basket that we are the destination for coming to buy those.

And just on the fresh, how did fresh perform?

Yes. In the release, we did note that fresh outperformed rest of store, led by meat and dairy. So we strength in those 2 categories. Anna, did you want to make any comments on what we saw in those bases?

Yes. What we've seen is actually fresh continually growing. And actually, what's pleasing is really accelerating in terms of quality and value metrics across the board. What we've seen me through really targeted investments for some time has been accelerating ahead of total store growth and that's important for us because it is a center of play and is the driver of store choice as well. So we continue to double down on making sure we've got the best quality and unbelievable pricing in there. Dairy continues to be strong and the protein trend remains. We have faced some availability challenges that have been kind of more structural and across the market in dairy, but we're starting to see those come to an end. And actually, we're confident we can accelerate that growth further. And actually produce has been strong in terms of quality metrics coming through as well. So we're pleased overall with fresh, and we'll continue to accelerate as part of our transformation programs in each of those areas as well.

The next question comes from Ben Gilbert from Jarden.

Just for my question, I'm just sent sort of changed over the last couple of months. And I suppose if I then play out in terms of where we're looking over the next 6, it feels like Wales are only really just doing a bank the benefits of CLR because they take a while to play through as was just a big ask because we've sort of seen that in the press. It feels like they're going to continue to lend pretty aggressively into price and LSP. You've got Amazon that's flying. And then you've got a situation where you've got sort of tobacco, these sort of things that may be just going to help some of the indies, et cetera. So I'm just in what's changed? And do you think the amount of money sort of being put into price at the moment now? And are you getting a lot of support from suppliers to help fund over and above to really get some price leadership back in the market? I know it's a bit in there, but I'm just trying to play out what's happened in and how this step change is looking over the next 6 to 12 months.

Ben, why don't I just quickly touch on where we are with suppliers. Look, I think what I'd say is -- we're very confident in the support we are getting from suppliers. We take a very collaborative approach with them, and we have long-term strategic sourcing programs now they've been running for a couple of years, and they are successfully running. And actually, all the joint business plans we put together with suppliers in terms of acceleration of each of our lines are coming through as we planned. And actually, what we're increasingly focused on is building long-term plans with suppliers to drive accelerated growth and volume together and mutual profitability. We're also working very end-to-end to take out cost and complexity out of our system so that together, we can reinvest those -- these efficiencies into value for customers. And what I would say, there's been a big change in recent months. We've seen a real appetite from suppliers to lean in with us. And that's not just in the near term, but on a long-term plan to truly accelerate volume and growth together. So we feel very positive about the future and the support we're seeing today, and I'm very energized about the opportunity of the way in which we are working with suppliers presents moving forward.

And so the step change in terms of last month or so is that there's been a much bigger push around lower shale prices at illegal is still pretty benign, I think, in terms of growth out there, it really only seems that Woolworths to change?

In terms of the supplier sentiment, are you saying to...

In terms of the competitive backdrop, the terms in the competitive backup is why October should necessarily soften as obviously, things picked up post sees. I'm sorry to captation echo this week. But -- and then it's dipped again in October. I'm just wondering, is there a a step change in promotional intensity? Do you think the market growth has slowed -- how do you think?

Yes. The market is very competitive, and that's across every competitor we're seeing there. But also, that's coupled with the customer behavior. We are seeing that customers are seeking out rate to value. In some categories, they're trading down and we are making sure that we really deliver against that value-conscious consumer and where we need to rework plans and put more investment into core lines, we're absolutely doing that. But I would say competitive market, coupled with the consumer sentiment has been where we're focusing our responses.

And as we've already outlined, Ben, the step up in value communication as we come into Christmas, we think is an important part of that. .

The next question comes from Adrian Lemme from Citi.

Look, the market had about $80 million of EBIT growth in the first half in its forecast. So I'm just trying to understand if if we can understand like the rough mix of this downgrade. So you would have obviously the deleverage that you've talked about, particularly in stores, which looks like it's in negative growth now. You've mentioned the fuel impact and obviously, the the targeted price investment. Are you able to give any color on like what the bigger drivers are in this downgrade, please.

Yes, Adrian, thanks. It's Charlie. Look, Adrian, look, from our perspective, I'm very really as clear as well. In terms of the drivers of margin and drivers of EBIT, they haven't changed, right? And in terms of our SSI program, continues and it's continuing strongly, and we're actually very confident it's going to deliver well over $1 billion, which will benefit both margin and CIDB. We did pull out good growth in Coles 360 in the quarter, and we've got some great plans to continue to grow that strongly. We do note, and you'll note that we continue to work with our supplier partners in terms of strategic sourcing and some of the better buying that and outlined a little bit earlier. What we really called out today, so if you think about the 3 elements that we've put out today, really, there's an element where sales haven't been in line with what our expectations are. So we've been really clear on that. So there is an element of, if you like, the sales flow through into. Secondly, we are announcing, and we have announced some targeted investments in areas to deliver value for this year, but to actually meet the consumer where they're at. has been really important. And the third thing is around fuel. And the element around fuel is, you recall back in Q4 last year, we called out fuel would be about a $15 million sort of impact for the half, for the second half of FY '26. What we're saying here in terms of fuel focus on strong number, it's slightly higher than that $15 million that we spoke about. What's really important now, look, I think in terms of the guidance that we've given today, really, it is about Yes, the 3 elements that I've spoken about. And I think it's sort of worth noting, Adrian, when we look at the sort of the 2-year basis, I mean, EBIT last year grew by 14.6% in the first half. So we are cycling strong earnings in the half. So looking on a 2-year basis, I mean, it is -- we are a touched on earnings over that 2 years.

And can I clarify, yes, my understanding on the in-store sales because it the growth slowed to 0.6% in the first quarter. Am I right to believe that it's probably flat to slightly negative now given the slowdown in overall trading and the online is still being strong?

As we said -- as we've said, the sales are not where we like and certainly not in line with our expectations. And in-store sales, specifically yes, obviously, are down. I wouldn't go into the negative territory. But I think we -- as we said earlier, and Michael spoke to it, we have seen really strong growth in our online channels, and that's been important and more importantly, increasingly profitably. .

The next question comes from Michael Simotas from Jefferies.

Look, it sounds like you've got a plan ahead to try to address the lack of sales momentum. What do you do if you put these investments into price and work on communicating value, but your sales momentum doesn't turn because the operating deleverage in the business can be devastating, and we'll see the impact of that in the first half. What do you do if you can't turn momentum? Do you just need to invest more?

I think, firstly, I'd say that we have a degree of confidence that the plan is going to get us to a place where we need to be in terms of improving that sales momentum as we come in into Christmas. And I'd probably say we've acted early here, right, which is we've recognized over the last few weeks that we're not comfortable with where we're at. And so we're moving quickly to take action we're not allowing it to get indebted, which is quite often more difficult than to get its turn. And then I would say from a risk around deleverage is cost control is one of our very strong muscles that we have built over time. And so we have continued to take actions as we've gone through this quarter to further tighten our control around cost and to put more into SSI. And that's a constant always on for us to be asking how does that equation work. And so that's really why when Charlie sort of outlined those 3 areas. They are very specific in terms of what is leading to us giving the EBIT guidance today, which is just around sales flow through because we're not where we want to be. It's some targeted additional investment into value and really doubling down on that at a time when we know it is going to meet customers where they're at and doing that early. And the third is just the fuel volatility that we've seen. So we will continue to keep a very close eye on cost that's coming through. And we have an SSI plan for this year, which really helps us to offset those increases that we've seen in things like wages and energy.

Yes. And Michael, it's sort of the portal, we are a margin business. We are a healthy management business. And together with that sort of cost control, I guess, allows us to remain highly competitive in this market. And yes, as I said, meeting the customer where they're at in respect of that view. So I think it is in that position that we that we give guidance today. .