The Coles Group Ltd [ASX:COL] share price has risen today after posting its first profit growth in four years.
The supermarket giant’s net profit rose strongly on the back of surging food sales.
At time of writing COL shares are up 1.16% or 22 cents, trading at $19.15 per share.
Along with competitor Woolworths Group Ltd [ASX:WOW], the two large supermarket chains have grown their market share significantly during the pandemic.
Despite a surge in food sales, not all of COL’s businesses have recorded increased performances.
Food sales a crutch for Coles?
Coles posted its first EBIT growth in four years.
Full-year sales revenue increased by 6.9% to $37.4 billion, which boosted net profit from operations by 7.1% to $951 million in FY20.
Earnings before interest and tax from its supermarkets rose 10.7%.
Unsurprisingly, COL enjoyed record sales growth in the March quarter — the height of the coronavirus pandemic.
Same-store supermarket sales grew by 13.1%, likely from shoppers stockpiling pantry staples during the period.
Same-store sales growth was up 5.9% for the financial year.
Online orders also rose strongly, up 18.1%
According to Coles, sales would have been stronger if not for capacity constraints during the first national lockdown.
However, their liquor, convenience and fuel business did not perform so well.
Liquor earnings were flat at $120 million, despite sales rising 8% to $3.3 billion and online sales growing by 40%.
The higher sales appear to have offset by weaker margins.
Coles convenience business lost $16 million compared to the $50 million in earnings recorded in FY19.
A drop of 2.3% in fuel sales for the year seems to have been a contributing factor.
What does this mean for Coles dividends?
Thanks to the strong growth in profit, Coles announced a 14.6% uplift in its final divided.
The supermarket giant will pay a fully franked dividend of 27.5 cents per share in September.
This will take the full-year payout to 57.5 cents, representing a payout ratio of 81% for the year.
Income investors are likely to be happy with that.
Keep in mind the results are far from watertight and next year’s dividend is not guaranteed to top this year.
WOW showed how well it could adapt to COVID-19 conditions, while COL stuttered a little.
And WOW has promised to ramp up the competition.
Now that we’re almost guaranteed to see semi-permanent changes in our daily lives, the question becomes how will Coles adapt?
CEO Steven Cain plans to cut costs by $1 billion over four years. To achieve this plan, Mr Cain said Coles will tailor its range and boost online capabilities.
Coles said it recorded $250 million in cost saving as part of its pivot to a greater use of technology, though this was offset due to higher cleaning, security and labour costs during the pandemic.
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