Digital Expansion And Cost Optimization Will Strengthen Future Operations

Key Takeaways

• Expansion of e-commerce and digital enhancements is expected to boost customer experience, online sales growth, and revenue.
  
• Strategic cost-saving initiatives and infrastructure investments aim to enhance efficiency, reduce expenses, and improve net margins and earnings.
  
• Challenges from management changes, regulatory updates, and financial pressures may threaten Coles Group's profitability and growth across e-commerce and overall operations.

Catalysts

Operates as a retailer in Australia.

• The continued expansion and optimization of Coles' e-commerce and digital offerings, including the rollout of customer fulfillment centers (CFCs) and improved personalization in the Coles App, is expected to enhance customer experience and drive online sales growth. This could positively impact revenue.
  
• The Simplify and Save to Invest program has already delivered significant cost savings and is expected to continue offsetting inflationary pressures, leading to improved net margins.
  
• Coles' strategic focus on fresh food quality and exclusive brand products is likely to attract more customers, potentially increasing basket penetration and boosting revenue.
  
• Investments in infrastructure, such as automation in distribution centers, are anticipated to enhance efficiency and reduce logistics costs, which could improve net margins and increase earnings.
  
• The anticipated fallaway of significant implementation costs related to ADC and CFC projects in FY '26 suggests a reduction in expenses, which would likely bolster future earnings.

Coles Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Coles Group's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 2.8% in 3 years time.
• Analysts expect earnings to reach A$1.4 billion (and earnings per share of A$1.01) by about March 2028, up from A$1.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.5x on those 2028 earnings, up from 22.2x today. This future PE is greater than the current PE for the AU Consumer Retailing industry at 21.1x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.5%, as per the Simply Wall St company report.

Coles Group Future Earnings Per Share Growth

Risks

• The departure of Coles Group's Chief Digital Officer, Ben Hassing, might impact the digital transformation initiatives, possibly affecting revenue growth in e-commerce as well as overall earnings.
  
• Potential regulatory changes, such as updates from the ACCC supermarket inquiry and tobacco legislation, could impact Coles’ operations and profit margins through increased compliance costs, affecting net margins and overall earnings.
  
• High cost of project implementations and dual running costs of the ADCs and CFCs are present now and limit current profitability; failure to realize projected efficiency gains could impact future EBIT margins.
  
• Inflationary pressures and related economic factors, such as increased promotional activity to address cost of living pressures, may squeeze margins, impacting overall profitability and earnings.
  
• Increased depreciation and interest costs due to capital investments could create financial pressure. If growth in revenues and operational efficiency does not meet expectations, this could negatively impact net income and earnings per share.

Valuation

• The analysts have a consensus price target of A$20.682 for Coles Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$23.6, and the most bearish reporting a price target of just A$15.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$48.3 billion, earnings will come to A$1.4 billion, and it would be trading on a PE ratio of 24.5x, assuming you use a discount rate of 6.5%.
• Given the current share price of A$18.47, the analyst price target of A$20.68 is 10.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.