Saturday, June 15, 2024

Coles delivers solid 2023 full year results

Coles Group has reported total sales revenue growth from continuing operations of 5.9% to $40.5 billion. The retailer recorded Q4 sales growth of 8% in supermarkets and 2.9% in liquor.

EBITDA and EBIT growth from continuing operations of 3.8% to $3,382 million and 1.8% to $1,859 million. Adjusted EBITDA and EBIT growth from continuing operations of 5.3% to $3,465 million and 4.5% to $1,942 million.

Coles Group Chairman James Graham says, “It is pleasing to record continuing sales growth and broadly stable after-tax profits from continuing operations in another year marked by challenging operating conditions. The payment of a steady final dividend of 30 cents per share is in line with our 80 to 90 per cent full year dividend payout policy. During the year there have been many highlights including achieving our highest ever team member engagement score amongst our 120,000 team members, reaching our target of 40% women in leadership and opening our first Automated Distribution Centre at Redbank in Queensland.

“As we look forward to our 2024 Financial Year, we have a strong leadership team with our recently appointed CEO, Leah Weckert, and a number of significant new appointments ensuring we are well placed to meet our aim of building trust and creating long-term shareholder value.”

Coles Group CEO Leah Weckert says, “Since demerger, our strategy has been to invest, innovate and drive sustainable growth for Coles. This past year we opened our first Automated Distribution Centre, achieved our target of $1 billion in benefits through our Smarter Selling program, divested our Coles Express business to allow greater focus on the core, opened or refreshed more than 300 stores and brought hundreds of exciting new products to market.

“Cost of living is the number one focus for our customers right now and we continue to invest in providing value through ‘DROPPED & LOCKED’, everyday trusted pricing, weekly specials, Flybuys and our exclusive brand portfolio. These initiatives are resonating with customers and we remain well positioned to grow in the current environment as more customers choose to eat at home,” she said.

“During my first few months as CEO, we have made some important additions to the executive leadership team with Michael Courtney appointed as our new Coles Liquor Chief Executive, Amanda McVay as Chief Customer Officer and Anna Croft as Chief Commercial Officer. I’ve also spent time listening to our team members and customers on what’s important to them. Customers want consistent availability and quality, great value and innovative products that make healthy meals easier and more convenient. Our team is energised to drive improvements in our operating model and team member capability that will improve productivity and deliver a more consistent customer experience,” Ms Weckert said.

“In parallel, the Board and executive leadership team have been working on the evolution of our strategy. With the purpose of “helping Australians eat and live better every day”, our evolved strategy will focus on creating a destination for food and drinks, accelerating through digital and delivering consistently now and for the future. This will help us continue to keep pace with an ever-changing environment and evolving customer preferences.

“I wish to thank our team members for their dedication to delivering for our customers and the communities we serve, and for their resilience during several years of challenges. I would also like to thank our suppliers and customers for their continued support.”

FY23 performance summary

Group sales revenue from continuing operations increased by 5.9% to $40.5 billion with growth in supermarkets sales revenue of 6.1% and liquor sales revenue broadly flat, due to cycling Covid-19 elevated demand in the prior year. Group gross retail sales from continuing operations increased by 6.3% to $41.8 billion. Group sales revenue from continuing and discontinued operations increased by 5.3% to $41.5 billion.

Notwithstanding investments in value, inflationary cost pressures and major project implementation costs, Group EBITDA and EBIT from continuing operations increased by 3.8% and 1.8%, respectively, supported by Smarter Selling benefits and a net reduction in direct Covid-19 costs compared to the prior year.

Major project implementation operating expenditure of $58 million was incurred during the year in relation to the two ADCs and two automated Customer Fulfilment Centres (CFCs), up from $32 million in FY22. This was lower than previously forecast largely due to the delays in the construction and commissioning of the automated CFCs. Depreciation in relation
to the Redbank ADC of $15 million was also incurred during the year.

Adjusted Group EBITDA and EBIT from continuing operations increased by 5.3% and 4.5% respectively, excluding major project implementation operating expenditure and a $25 million provision taken in FY23 relating to the 2020 Award covered salaried team member review.
Financing costs from continuing operations increased by 9.4% to $394 million with interest on lease liabilities increasing due to higher borrowing costs impacting lease renewals in addition to new leases, including the Redbank ADC. Also contributing to higher financing costs was interest on debt and borrowings which increased as a result of higher interest rates on the short-term revolving debt facilities.

Discontinued operations and divestment impacts
On 21 September 2022, Coles agreed to divest the Coles Express fuel and convenience business to Viva Energy Group Limited (Viva Energy).

The transaction was completed on 1 May 2023 with Coles receiving gross proceeds of $319 million ($300 million proceeds and a $19 million working capital adjustment) and assigning the leases relating to the Express business to Viva Energy.

These leases accounted for $816 million of lease liabilities on Coles’ 2022 full year balance sheet.

Underlying EBIT for the Express division for the period to 1 May 2023 was $46 million, excluding the impact of the depreciation and amortisation that ceased from the date the Express assets were held for sale of $83 million and the loss on sale of $18 million

Imputed lease interest associated with the leases being transferred up until the date of completionwas $29 million.

A loss on sale (before income tax) of $18 million was recorded on a statutory basis. The profit / loss on sale was also impacted by depreciation and amortisation ceasing from the date the Express assets were held for sale. Underlying profit on sale was $65 million, after adjusting for notional depreciation and amortisation of $83 million.

A Product Supply Arrangement (PSA) with Viva Energy was also established as part of the divestment and commenced on 1 May 2023 with the revenue and costs associated with this agreement included in the ‘Other’ segment.

Supermarkets

Key highlights

Supermarkets sales revenue of $36.7 billion for the year increased by 6.1% on the prior year, with growth in the second half up 7.7% over the prior corresponding period compared to 4.6% in the first half. Gross retail sales of $38 billion for the year increased by 6.6% and comparable sales grew by 5.8%.

Sales growth was delivered through the ‘DROPPED & LOCKED’ value campaigns and the successful execution of trade plans, including festive events such as Easter, Christmas and Mother’s Day. More targeted and personalised customer experiences and offers, and collectible and continuity campaigns, also supported sales growth throughout the year. Excluding tobacco sales, sales revenue increased by 7.4%.

Volumes improved throughout the year, with volume growth moderately positive in the second half. The first half was impacted by cycling elevated Covid-19 volumes in the prior year and availability challenges, particularly in fresh and frozen produce with severe flooding and cool weather impacting growing conditions. Volume growth in the second half was positive across all major categories, with the exception of health and home, which continued to cycle elevated volumes in the second half of FY22 as a result of Covid-19 (Omicron) and the flu season.

Availability improved progressively in the second half with Delivered In Full (DIF) and Delivered In Full On Time (DIFOT) availability metrics increasing to 90% (87% at 1H23) and 84% (80% at 1H23) of pre-Covid-19 levels, respectively. In particular, access to fresh produce volumes improved significantly as the business cycled shortages from flooding in the prior year. While a number of challenges still remain, particularly in eggs and frozen vegetables, the overall improvement in availability has allowed Coles to restore its promotional activity to pre-Covid-19 levels.

Customer satisfaction (as measured by NPS) was impacted during the year, due to availability as well as cost of living pressures that impacted price and value metrics. Improvements were seen in some lead indicators in the fourth quarter.

As rising cost of living pressures impact Australian households, the Exclusive to Coles range has become increasingly important in delivering trusted value to customers. Exclusive to Coles sales growth increased by 9.6% to $12.4 billion in FY23. Sales accelerated throughout the year with hundreds of Coles Own Brand products included in the ‘LOCKED’ and ‘DROPPED & LOCKED’ value campaigns, the expansion of the Coles Finest range to cater for customers seeking restaurant quality products, and bulk favourites such as Coles Australian Extra Virgin Olive Oil 3L catering for customers on a budget. Growth in the second half was 12.3% compared to 7.1% in the first half. This growth was experienced across the portfolio, from entry level pantry staples in the pasta and canned fish categories, to meals and in-store bread in the Coles Finest range.

More than 1400 Exclusive to Coles products were launched during the year, including the Coles Kitchen Chicken Pesto Pasta Bake and the Coles Finest lamb range. In the growing pet segment, pet treats such as the Woofin’ Good Peanut Butter Flavour Dog Biscuits and Elevate Joint Support Chew Dog Treats were launched. The Coles Own Brand portfolio also won 103 product awards, including 11 consumer-voted Product of the Year awards for products such as our Coles Finest Certified Carbon Neutral Beef Scotch Fillet Steak, Coles Frozen Sweet Potato Chips and Coles Salted Caramel Vienna Sticks.

Coles Own Brand continues to drive sustainability within the industry and was recognised at the Marine Stewardship Council’s (MSC) Sustainable Seafood Awards, being the first and only Australian retailer to have MSC Chain of Custody certification for its deli seafood counters.

E-commerce sales for the full year increased by 1.1% to $2.8 billion (three-year growth of 116%). Strong sales growth of 10.1% was delivered in the second half (17.4% growth in the fourth quarter) while sales in the first half declined by 6.6% as Covid-19 behaviours normalised and some customers returned to shopping in store. Penetration was 7.5% for the full year with 8.0% penetration in the fourth quarter. Sales growth was underpinned by 5% growth in traffic to Coles’ digital assets, as well as network expansion, particularly in immediacy. Rapid Click & Collect is now available in 606 stores (151 stores were added during the year) and Home Delivery Rapid is now available in 480 stores (463 stores were added during the year). Enhancements were made to the unified Coles app and website including the capability to opt-in to substitutions at check-out in the website, the ability to apply a range of filters (e.g. dietary, brand) and integration of Flybuys offers in the app, driving loyalty and improving the overall user experience. Efficiency improvements in grocery crate utilisation were also delivered during the period by increasing items per crate and consolidating picks, reducing distance walked to fulfill orders and reducing manual handling.

During the year, Coles’ media income also increased by 27% with accelerated investment in product innovation, technology and talent, and the rebranding of the platform to ‘Coles 360’.

In the fourth quarter, total supermarkets price inflation of 5.8% continued to moderate (6.2% in the third quarter) with inflation in the fresh category of 2.3% (4.1% in the third quarter). In the fresh category, deflation in fresh produce was driven by vegetables, particularly cucumbers, broccoli and capsicum, while inflation in meat, deli and seafood moderated largely due to red meat. However, bakery inflation remained elevated due to higher wheat commodity prices. In the packaged category, dairy inflation increased as a result of an increase in the farmgate milk price. Higher commodity prices, such as eggs and oil, also impacted the category. The level of supplier cost price increase requests remained elevated but was lower compared to the first half, with the main drivers of the requests relating to raw materials such as wheat, dairy and sugar, and utilities.

During the year, Coles completed 46 store renewals, including 14 Format A, four Format C and four Coles Local stores. Coles also opened 17 new stores and closed six stores, taking the total network to 846 supermarkets.

Gross margin of 26.4% increased by 5 bps year-on-year despite investment in value and mix changes. Gross margin was supported by reduced Covid-19 costs, the delivery of Smarter Selling benefits, growth in Coles 360 and lower tobacco sales. However, total loss increased by approximately 20% this year and remains an industry-wide headwind as a result of elevated levels of organised retail crime and theft driven by cost of living pressures.

Cost of doing business (CODB) as a percentage of sales increased by 20 bps to 21.6%. CODB increased as a result of underlying cost inflation and wage increases following the June 2022 Fair Work Commission (FWC) annual wage increase. CODB was also impacted, particularly in the second half, by increased depreciation, major project implementation operating expenditure, a $25 million provision relating to the 2020 Award covered salaried team member review and a range of adverse events, such as additional public holiday costs and costs associated with the collapse of REDcycle. These costs were partially offset by Smarter Selling benefits and lower direct Covid-19 costs in FY23. Further strategic investments were also made in digital, eCommerce and technology this year, in areas such as Coles 360 and e-commerce platforms.

Supermarkets EBITDA of $3,157 million increased by 4.5% and Supermarkets EBIT of $1,765 million increased by 2.9% with an EBIT margin of 4.8%. Higher depreciation and amortisation was incurred during the year, largely a result of the commencement of depreciation at the Redbank ADC site as well as increased amortisation on software assets, in line with the increased investments in digital and technology assets.

Supermarkets adjusted EBITDA and EBIT, excluding major project implementation operating expenditure and the provision taken in FY23 relating to the 2020 Award covered salaried team member review, increased by 6.1% and 5.8%, respectively. The adjusted EBIT margin of 5% was in line with FY22.

Update on ADCs

Coles delivered a significant milestone during the year with the Redbank, Queensland ADC commencing outbound deliveries in March. The ADC serviced more than 100 supermarkets at year end in Queensland with ramp up remaining in line with schedule. The recruitment, induction and training of the new Redbank team members also continued.

Construction progressed at the Kemps Creek, New South Wales ADC. Initial commissioning work also commenced at the facility in line with schedule.

Update on automated CFCs

As announced on 18 August 2023, Coles has received notification from Ocado regarding delayed timing for the handover of the Victorian CFC. Additional works are required to rectify construction issues with the grid identified during quality control processes for the Victorian CFC. Following further engagement with Ocado and in light of the revised handover date, the commissioning of the Victorian CFC will be delayed with the incremental ramp up period now expected to commence in mid-FY25 (previously mid-FY24). The New South Wales CFC is expected to be commissioned with an incremental ramp up period commencing at the end of second half of FY24 (previously second half of FY24).

The impacts of the delays are likely to increase the project capital and operating expenditure by approximately $70 million and $50 million respectively. Total capital expenditure is now expected to be approximately $400 million of which 55% has been incurred to the end of FY23, with the balance expected to be incurred in FY24 and FY25.

Liquor

Key highlights

Liquor sales revenue of $3.6 billion for the year was flat compared to the prior year, having declined in the first half by 2.4% as the business cycled Covid-19 related on-premise closures and restrictions, before returning to growth of 2.7% in the second half. Gross retail sales of $3.6 billion for the full year declined by 0.2% and comparable sales declined by 0.7%.

The sales performance during the year was driven by a strong performance in the Liquorland banner, supported by the completion of 215 Liquorland Black & White renewals as well as the opening of 35 new Liquor stores. The Ready-to-Drink category was the strongest performing category. In line with Liquor’s strategy to “be a simpler, more accessible and locally relevant drinks specialist”, a focus on optimising range and space, particularly in local products, has been a core part of the transformation of the Liquorland fleet. Growth in the ELB portfolio continued, with sales revenue increasing by 8.5% for the year and penetration reaching 21% of total sales, as customers became more value conscious throughout the year.

Sales revenue also benefited from strong growth in e-commerce and inflation, driven by supplier-led cost price increases following the semi-annual excise increases.

During the period, 259 new ELB and 627 new local lines were added to the portfolio. In addition, the ELB portfolio received more than 500 awards, including the Tasmanian Gin of the Year trophy for Pure Origin Tasmanian Dry Gin at the Melbourne International Spirits Competition and Tinnies Pale Ale being awarded the Best English Beer Pale Ale Trophy in the Pale Ale category, at the World Beer Awards Competition.

E-commerce sales revenue of $203 million increased by 22.6% compared to the prior year, accelerating throughout the year with growth in the fourth quarter of 38.2%. Penetration was 5.7% for the year. Penetration including Coles Online was 6.9% for the year and 7.5% for the fourth quarter. Sales growth was driven by on-demand delivery which is now available in more than 660 stores, and the introduction of express delivery through DoorDash and UberEats.

Customer satisfaction (as measured by NPS) was also impacted by cost of living pressures which impacted value metrics.

During the year, 236 store renewals were completed, 35 new stores were opened and 11 stores closed across the Liquorland, Vintage Cellars and First Choice banners. At the end of the period the portfolio comprised 957 stores.

Gross margin of 23.4% increased by 91 bps driven by strong performance in ELB and local, value optimisation, mix benefits and strategic sourcing.

CODB as a percentage of sales increased by 109 bps to 19%. This was largely driven by increases in store team member remuneration relative to the prior year following the FWC annual wage increase in June 2022, coupled with the increase being paid earlier in the year than prior years, and costs (including depreciation) incurred in relation to new stores, the accelerated Black & White Liquorland renewal program, and investments in e-commerce and core IT systems.

Liquor EBITDA of $279 million was flat on the prior year despite cycling on-premise closures. EBIT of $157 million decreased by 3.7% reflecting increased depreciation and amortisation following investment in the portfolio as part of the transformation program, most notably the Black & White Liquorland renewal program and eCommerce investments.

EBITDA and EBIT increased by 13.2% and 19.5% respectively in the second half, benefiting from the sales and margin growth across the fixed cost base of the business.

Other

Coles reported negative EBIT of $63 million in ‘Other’ for the year.

Other includes corporate costs, the Product Supply Arrangement with Viva Energy that was established as part of the divestment of the Coles Express fuel and convenience retailing business, Coles’ 50% share of Flybuys’ net result and the net gain or loss generated by Coles’ property portfolio.

Corporate costs of $91 million were incurred for the year, an increase of $9 million over the prior year largely as a result of higher insurance costs and store support centre costs. Coles’ 50% share of Flybuys’ net result was a $13 million loss, while earnings from property operations were $39 million. EBIT of $2 million was also reported in relation to the Product Supply Arrangement that was in place from completion of the Coles Express divestment which occurred on 1 May 2023.

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