Coles Group reported 2.5% sales growth and 10.2% EBIT growth in 1H26. The key driver of earnings was higher gross profit margins, which should persist in 2H26e, but then fade in future years. Cost savings and productivity benefits from its supply chain investment are also boosting profit margins. Coles sales trends have slowed highlighting the Woolworths DC strike benefit was transitory. However, its growth still outstripped Woolworths on a two-year basis. Coles has de-rated over the past month and its sales momentum is likely to converge with Woolworths over the next 3-6 months.

Coles reported FY25 EBIT up 7.5% on a 52-week basis. Growth was stronger in Supermarkets, partly offset declines in Liquor and higher overheads. Coles has had a strong start to FY26e sales in Supermarkets, which we largely attribute to market share gains. The combination of better sales, one-off costs from last year rolling off and supply chain savings should support group EBIT growth of 12.5% in FY26e. We expect growth to then step down to 5%-7% in FY27e and beyond.

Coles reported 1H25 EBIT up 5% with a stronger lift in its Supermarkets division of 7%. The company had solid sales trends, which partly reflected a benefit from Woolworths DC strikes. Underlying sales and EBIT growth in the Supermarket business is closer to 3%-4%. Cost savings and DC efficiencies are offsetting natural cost inflation, not boosting margins. Over the next 18 months, Coles will benefit from the unwind of transition costs that will lead to double-digit EPS growth.

Coles reported 1Q25 supermarket sales trends slightly ahead of Woolworths. The bigger debate is whether Coles has achieved the result with less price investment. The short answer is yes, but not in a way that will protect Coles sales or margins in future. Overall growth is weak for both retailers with broadening competition for groceries in Australia. Coles decision to build another Witron DC in Victoria is logical but the cost increase suggest the return on capital may be lower than the first two DCs it built.

Coles reported 3Q24 comparable sales growth of 4.2% for its Supermarkets. It was a good quarter for Coles. However, we expect it is a peak in growth with some transitory factors and fading inflation leading us to forecast 2.5% comparable growth for 4Q24e. Liquor had a much weaker period and sales declines are likely to continue as the industry volumes reset lower and Coles unwinds some loss-leading sales.

Coles 1H24 results revealed a tight control on costs in its Supermarkets division and some easing of the headwind in stock loss. The retailer has started 2H24e strongly in its Supermarket business. While some of the momentum is likely to ease off, Coles should achieve market share gains in 2H24e. We also see further improvement in stock loss driving underlying EBIT higher in 2H24e.

Coles had stronger 3Q22 sales growth largely driven by higher food inflation. While market views vary, it is clear that inflation is adding to revenue growth with more to come over the remainder of 2022. Even with better sales growth, Coles is losing share, driven by fewer store openings. The company may be rational in shutting stores, but the rest of the market is not following. Coles Liquor comparable sales growth was a highlight, comfortably outstripping Endeavour. However, the business has a long way to go to lift sales productivity to a level anywhere near Endeavour.