Future Supply Chain Efficiency Will Improve Due To ADCs And CFCs Investments

Key Takeaways

• Investments in digital assets and initiatives in distribution centers are expected to enhance e-commerce and supply chain efficiency, boosting revenue and reducing costs.
  
• Strategic acquisitions and media program success could secure supply chains, expand market share, and increase high-margin revenue streams, improving net margins.
  
• Coles Group's profitability may be challenged by cost inflation, competitive pressures, and uncertain returns on strategic investments amid changing consumer preferences.

Catalysts

Operates as a retailer in Australia.

• Significant investments in digital assets and enhancements in customer experience are expected to drive continued growth in e-commerce sales, which could boost overall revenue.
  
• The ramp-up and operational benefits from the Automated Distribution Centers (ADCs) and Customer Fulfillment Centers (CFCs) are anticipated to improve supply chain efficiency and reduce costs, potentially enhancing net margins.
  
• The expansion and success of programs like Coles 360, which have shown strong growth in media income, could increase high-margin revenue streams, positively impacting earnings.
  
• Strategic acquisitions of milk processing facilities and liquor stores aim to secure supply chains and expand market share, which could contribute to revenue growth and improved net margins.
  
• Continued investment in loss prevention technologies and Simplify and Save initiatives are expected to offset rising costs, providing a positive impact on net margins.

Coles Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Coles Group's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.6% today to 2.8% in 3 years time.
• Analysts expect earnings to reach A$1.3 billion (and earnings per share of A$0.99) by about February 2028, up from A$1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.8x on those 2028 earnings, which is the same as it is today today. This future PE is about the same as the current PE for the AU Consumer Retailing industry at 22.8x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.18%, as per the Simply Wall St company report.

Coles Group Future Earnings Per Share Growth

Risks

• Coles Group faces a challenging cost environment with cost inflation and loss headwinds that could negatively impact net margins.
  
• The Liquor segment experienced a decline in underlying EBIT due to wage growth, fixed cost deleverage, and increased D&A, which could continue to affect earnings if these pressures persist.
  
• Supermarket competition from various participants, such as Amazon and Bunnings, particularly in non-food segments, could pressure sales revenue and gross margins.
  
• Coles' large investments in strategic projects, such as automated milk processing facilities and liquor stores, might not yield expected returns, potentially impacting operating cash flow and net profit.
  
• Changes in consumer preferences due to economic pressures, along with a focus on rationalizing inventory levels, could adversely affect revenue growth across both supermarkets and liquor stores.

Valuation

• The analysts have a consensus price target of A$19.01 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$21.0, 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$47.1 billion, earnings will come to A$1.3 billion, and it would be trading on a PE ratio of 22.8x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of A$19.27, the analyst price target of A$19.01 is 1.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.