Coles Group Limited (COL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Coles Group Limited First Quarter '24 Sales Results Call. [Operator Instructions] I would now like to hand the conference over to Leah Weckert, CEO. Please go ahead.

Thank you, and good morning, everyone. Welcome to Coles Group first quarter sales results of the 2024 financial year. Before I begin, I'd like to acknowledge the traditional custodians of this land on which we meet today, the Wurundjeri people of the Kulin Nation. We acknowledge their strength and resilience and pay our respects to their Elders past, present and emerging. I'm joined today by Charlie Elias, our CFO; Matt Swindells, our Chief Operations and Sustainability Officer; Ben Hassing, our Chief Digital Officer; and Mark Howell, our General Manager of Liquor Finance, who is attending in place of Michael Courtney who is currently overseas. Before I open up to Q&A, I would like to make some comments on the first quarter results. We delivered group sales revenue growth from continuing operations of 6.7% to $10.3 billion and gross retail sales growth of 7.5% to $10.6 billion. In supermarkets, sales revenue grew by 4.7% with gross retail sales of 5.7% and with comp sales of 4.6%. This was supported by e-commerce growth of 25%, the launch of the "Great value. Hands down" campaign and the DC Comic collectibles. In liquor, sales grew by 1.8%. The timing of the AFL Grand Final, which fell in the first quarter of the prior corresponding period, but will fall in the second quarter this year had an impact. So we have also provided the 14-week growth number from the 26 June to the 1 October, which was 2.5%. Sales were supported by e-commerce, Black & White renewals, the price drop value program and local range tailoring in new stores. We continue to focus on providing our customers with more value at the checkout through our "Great value. Hands down" campaign as well as everyday prices, weekly specials and personalized Flybuys in supermarkets and the PriceSave campaign in liquor. Our expanded exclusive to Coles brand portfolio across both supermarkets and liquor has never been more important. In supermarkets, exclusive to Coles products grew at 9.4%. In liquor, ELB products grew at 2.4%. Pleasingly, for customers, availability continued to improve and inflation in key categories moderated. Grocery, dairy, non-food and Baker continued to be in inflation, whereas fresh produce and red meat were in deflation. Fresh produce deflation was particularly pronounced in July, moderated in August and then further into September. Looking ahead, in the early part of the second quarter, supermarkets and liquor sales revenue is broadly in line with the first quarter. And just to be clear, the liquor trend is based on the AFL Grand Final adjusted number. The Curtis Stone and barbecue collectible range has also had a strong start and is already proving popular with customers. We launched our Christmas range 2 weeks ago, and there is already quite a few products available in store and early sales results from these are encouraging. Customer research indicates more customers will be cooking and eating at home this Christmas season, and we believe we have a great range of products to support them to do that. Although this is a sales call, I would like to spend a couple of minutes talking about loss. Enhanced process security and service measures to reduce total loss have been rolled out across these markets in the first quarter and will continue into the second quarter. Pleasingly, improvements in waste and markdown have been achieved across the quarter. In stop loss, the loss Technology Solutions Skip Scan and Smart Gate are expected to be operational in over 250 of the most impacted stores by the end of calendar year 2023. The early results of store the technology being rolled out are in line with our expectations. In addition to this, the number of broader cost and margin optimization measures have been initiated across the group with some benefits expected in the first half. Finally, on our transformation projects, the [indiscernible] ADC and Red Bank now has all stores transitioned and the New South Wales Kams Creek site is on track to receive inbound orders in Q1 -- so Q3, I should say. The CFCs are also on track versus schedule, the schedule we shared at the full year reporting and the remediation works are progressing well, and we now have bots operating successfully on the grids at both sites. So with that, I will now hand back to the operator for Q&A.

[Operator Instructions] Your first question comes from David Errington with Bank of America.

Leah, at the full year result, and I know it's a sales call, but it was such a big issue, and you've called it out that you just needed to address it, and that was in your loss. And you've really made some great progress in rolling out Skip scan and Smart Gate to 250 stores. But I noticed that you've called out that your improvements to date are mainly in waste and markdowns. Is that -- are you referring that at this stage, even though you're making great progress, you're still -- you haven't really dented theft yet. Is that a fair call? But just given this great progress that you're making that, that's yet to come. Is that what you're trying to tell us today?

So perhaps if I go back to where we were at the full year and just reflect a little bit on the H2 results. So in the H2 result, what we highlighted is that we had a drag in there due to total loss. And total loss includes both waste and markdown and stock loss components. So we have put in place a strong plan to address both of those elements. From a waste on markdown perspective, we have seen improvements across the course of the quarter. And in fact, we're now running at a rate on that, which we are happy with and satisfied to sustain going forward. That is the key area where we have seen improvement across the quarter. We have rolled out initiatives to address stock loss. And as you've highlighted, we expect to have the technology solutions in place by the end of the calendar year in 250 of the most impacted stores. And at this stage, we would expect to see benefits from that on the stockless number starting to come through in H2.

So it seems like everything is going according to plan, and we should start seeing some good benefits coming through in '24. So that sounds pretty pleasing. The second question, if I may.

Sorry, just before you move on, I would make the point that from our perspective, it is a short-term problem. So -- and actually, this is a short-term opportunity for us at this point, which is we have a strong plan. We know what needs to be done. We're getting it done and the numbers will move. And I also do want to highlight that in addition to all the measures that we're putting in place, given we are expecting the stock loss benefits to start to come through in H2. We have initiated a number of other actions across the group while we have that headwind in play, we look to address some of that through other initiatives on cost and margin optimization. Sorry to interrupt.

No, not at all. None at all. It's a very good feed, good color. The second point is the availability. You seem to have made some really good progress with on-time delivery. Has that transpired to shelf availability because you did have some problems there, like, for example, like chicken and eggs and that you had problems, which I'm assuming would show up that your on-time delivery would increase, but it might still impact your on-shelf availability. Are your numbers as good on shelf availability as they are on term delivery times? Or is there still a gap in on-shelf delivery that you need to address?

The benefits that we're seeing or the improvements we're seeing come through on the [indiscernible] are definitely translating into improved on shelf availability. And that, in turn, is translating into improved customer satisfaction as well. I might just get Matt to maybe just give a bit of a color on...

Yes, sure. So David, our inbound fulfilment from supplies definitely steps on significantly. We are broadly in line with pre-COVID levels around the volume that's coming in. There's a little bit of opportunity still on timing. But that directly then translates into improvements both in gaps on shelf and in our online fulfilment. And we've seen some of our best metrics in 2 years come through in availability as part of that recovery. So there is absolutely correlation there. There are still some pockets at time. So [indiscernible] still an area of supply that can be challenged, but across the whole both our customers and our store team members would say that we're in significantly better shape than we have there for some time.

Excellent. And just before I go, Leah, I must admit, I'm glad you called out the Grand Final as impacting your quarter because last time I saw you, I think you said that you shamelessly supported anyone, but Collingwood, and I just wanted to point out that Collingwood did win the grand final this year, which was a very pleasing outcome for us [indiscernible] supporter. So I just wanted to highlight that to you, Leah.

Thanks, David. I think as you know, every other person in my household is a Collingwood supporter. So it has been [indiscernible] somewhat significantly for me over the last 2 weeks.

The next question comes from Richard Barwick with CLSA.

I thought one of the highlights here was the strength in online. So it's a really strong outcome there. And I guess it's been touched on a little bit, but maybe it's tied in with the availability. But is there anything else that you've done or can call out to, I guess, explain why there's such a strong growth in online?

Thanks, Richard. Yes. I mean I think there's a few elements to this. Availability component has definitely helped us to improve our customer satisfaction scores in relation to online, but we've also been doing quite a bit of work on the features we've got in up in the website and also the network. I might maybe just get Ben to give a little bit of color around that.

A little bit, it's hard because there's so much, I guess, it would be the sum just 1% -- as Leah and Matt mentioned, there's been improvements in availability. And when you have issues and availability and online, they become more pronounced from a customer experience standpoint. We've seen a really big step up in customer experience scores. But we're on a journey. And one of the things that we've been consistently talking about is unifying the customer experience. So if you think about the app, it just turned to at the end of the quarter that it's shoppable. And it's not in the terrible 2, by the way. Actually, the customers really enjoy that. We unified the website in the third quarter. And we also in the last quarter as well as this quarter, we began integrating loyalty. So we're on a journey. We know there's still a lot more that we can do, but I'd really say it's a sum of a lot of different pieces of the customer journey.

And I think the [indiscernible]. Sorry, Richard, I just say, I think the integration of the Flybuys offers into the app that has helped us on a couple of fronts. I think it's helping customers to find full value through [indiscernible]. And I think some of the features that were also landed during the quarter around the filtering ability on lowest unit price on specials and online brand has also helped that, too.

Yes. Okay. And within that set of integration with the loyalty, does that also include, I guess, more targeted promotions or targeted deals and so on to customers via online?

Yes. I'll just pick up really quickly. We're focused a lot more on personalization. So you get a lot more efficient promotions -- 2 big events that we ran as an example with the July big deal event, which was a personalized offer by customer cohort as well as the Coles Plus week event. So we're adding more personalization in our promotions and is having a good effect.

Your next question comes from Bryan Raymond of JPMorgan.

Just my question is around the sales line in supermarkets. Just can you understand the price elasticity you're seeing. I noticed your private label growth is a bit stronger than your major competitor, but the slowdown in inflation was similar, but you didn't see quite as much of a volume and mix uplift as what they did in the quarter from a sequential basis, looking at the fourth quarter '23 versus first quarter '24. Just keen to understand how you're seeing consumer behavior respond to this lower level of inflation and whether you're capturing that upside at the moment and market share in the quarter?

Yes. Thanks, Bryan. So I think our view on the sales result is we're actually quite pleased with it. We think it's a really solid result for the quarter, particularly given the strength of what we were [indiscernible] last year. And I think, candidly, the magical builders, Harry Potter campaign last year was probably a bit stronger than the DC Comics this year. If I refer you to the -- a couple of numbers in the supermarkets table, the sales ex tobacco was at 5.9%. And then the inflation ex tobacco was at 3.1%. So in terms of that differential 2.8%, that covers both your volume growth that we saw and also the impacts of mix. So and volumes were definitely positive for us, led by food. And if I was to sort of prioritize the categories where we saw the most volume growth, fresh produce was definitely #1 in that space as we saw deflation there. Customers definitely bought more of it. We also saw really good volume growth in meat and really good volume growth in grocery. And then it was sort of the nondiscretionary areas the household items where we saw volume growth was a little bit weaker.

Just on the theft piece. You're calling out post the result last -- in August that you had about a 70 basis point headwind from -- to gross margins from theft alone in that period, if I understand that correctly. Just can to understand how we should be thinking about that number in the first quarter? I know it's a sales result, but just keen to understand if there is any progress on that gross margin headwind if the underlying run rate of theft has gotten any better. I know some of the implementation is taking time, which is understandable. But can you just get a feel for that piece in the first half '24?

So I mean, the first thing I'd say is that the drag on the H2 results that you've identified there was total loss. So it was inclusive of the effects of waste to markdown and the effects of stock loss. As I've highlighted, the way to mark down, we have successfully improved that across the quarter, and we're now running at a rate on that, that we feel comfortable with to sustain going forward. So in terms of how we think about total loss and our total stock adjustments that we're making across the store, the improvements during the quarter have come from the waste and markdown. We are not calling out any worsening of the stock loss number. We are very focused on the plan that we have. We have put in place a large number of measures now, and we are optimistic about the stock loss technology that's going on -- going in with this Skip Scan and the Smart Gates because the stores that we have already put it into are delivering results in line with the expectations that we have.

Your next question comes from Shaun Cousins with UBS.

Maybe just further on theft. How many stores had the Skip Scan and Smart Gates at the end of the first quarter '24? And maybe just can confirm, I think we're coming from a base of 4 at the end of the fourth quarter '23, please?

Yes. We won't be disclosing the number of how many we're at the moment. It is changing daily because, as you can imagine, with 250 being rolled out across the half, we are going at pace. So it is definitely higher than 4, but we're headed towards the 250 by Christmas.

And then maybe just another conscious is profit sort of this question, but maybe for Charlie, you're trying to [ cardo ] cost step up dramatically in fiscal '24 as per your guidance relative to '23. How should we think about that first half, second half skewing that it was quite second half weighted in '23? I'm just curious if there's any sort of guide you could provide there, please?

No. Look, I think John will kick off, firstly, this is a sales call obviously not an earnings call. But in relation to, I think, the project implementation costs, which are obviously in the CODB perspective, I think if I just give a bit of a weight because I know there are a material amount. If I give a bit of a weighting on that. We believe on the [ Bitron ] side, they're probably closer to 50-50 across first half, second half. And if I look at Ocado, they're probably weighted that they will probably -- they are more weighted to the second half as we expect, obviously, the first of the CFCs to go live into the second half of the fiscal year.

Fantastic. And maybe just my final question, just to follow up on Liquor. Maybe just how you see the aggression in promotions and just the promotional environment in the Coles was quite aggressive online earlier this calendar year. I'm just curious how you've sort of seen the broader promotional environment, any change from your -- from Endeavor or Dan Murphy's. And how is Coles sort of gone about promotional intensity, please, during the quarter?

We -- in terms of promo, obviously, we have a range of different promotional mechanics. We haven't seen the breadth or depth of those promotions actually increase year-on-year. So the actual promotional depth actually is relatively similar to what it was in Q1 of FY '23.

[indiscernible] the market?

Yes, broadly in terms of the market, that's what we're seeing as well.

Your next question comes from Tom Kierath with Barrenjoey.

I just want to clarify that comment on where you say a number of broader cost and margin optimization measures have been initiated. Is that over and above the simplify to say stuff -- so in other words, these are incremental measures that have been identified since you outlined that program?

So the measures that we're calling out there, quite a few of them wouldn't be included in Simplify and save. So for example, when I talk about margin optimization, I'm really talking about things like promotional optimization, which we would include in simplifying sales. So that's going around the promotional program and making sure that, that's strong in terms of driving incremental margin. It's also things like we have upweighted our focus and strength of the plan that we have for Coles 360 in the half and are really pushing hard on that. And then on the cost side of things, we have done some things like reprioritization of spend within the half and rephasing of spend, which is more temporary measures to help us to offset the impact of the stock loss in the half.

And then just secondly, just on the stores that have Skip scan and Smart Gates, are you noticing a difference in sales growth versus the rest of the group. I'm just cognizant that you're doing this pretty quickly, you're doing it a really important trading period. So want to understand if there's any kind of sales impact as people, I guess, get pulled up or what have you at the checkouts.

Yes. There's also we've got it in so far, we haven't seen any impact. And I probably should share that one of the first stores we put it in with my local so that I had to go and experience it 3 or 4 times a week with my kids. And I can report that for customers that are doing the right thing, it's pretty seamless. And actually it's an improved experience because I don't have to waive interventions anymore.

Your next question comes from Michael Simotas with Jefferies.

Sorry to labor the point on stock loss, but just another one for me on that. In addition to the technology, you've called out process security and service measures to reduce total loss, and I appreciate some of that is around the technology. But how significant is the incremental cost investments that you've made there so far? And what do you expect over the course of this financial year.

I'd probably say at a high level, the way we're viewing it is we're balancing out the costs with benefits that are coming out from those additional -- in particular, the security and service measures. Maybe I can get Matt to just articulate a little bit what some of those look like.

Yes, sure. Thank you. The best way to think of the operational focus is probably in 3 areas. So we increased security in stores that really needed the most, and there's obviously a double benefit there, not just around stock loss but also for team member safety. The second part really needs to think of our investment in service. So having the right focus in the right stores at the right times at the front end, which, of course, gives us the additional benefit of a better customer experience. And then the third part is around increased management focus and coaching of process. So clearly, there's a different degree of investment with each of those 3. We track them very closely. We're making sure that where we make changes, we get a return on that. And I would say that the technology is clearly a structural part of that change. It has to work hand in glove with our operational focus, and it all has to have an overlay of good financial return. And I just want to remind the analysts on the call as well as we did call out that we will be managing CapEx rollout of this technology within the capital envelope that we've already guided. Okay.

So just to be clear on that, the incremental OpEx that you're putting in, you're effectively getting a one-for-one payback on that immediately.

Well, I think it's fair to say that we will continue to execute changes that give us a return, and we'll review the ones that wouldn't.

Okay. All right. And second question for me is just around volume. Now you don't disclose volume and we can sort of have a directional go at it by looking at the difference between sales growth and inflation. But I sort of make some adjustments for what's happening in ASP around the industry, it looks like your volume growth is very modestly positive and well below the rate of population growth while your major competitor appears to be growing volumes a little bit faster than population growth. Is that assessment right? And why do you think your volumes are lagging population growth, if that is correct?

I'd refer you back again to that sales ex tobacco at 5.9%. And then the inflation number for sales ex tobacco at 3.1%. And so that number that you get there is the combination of volume growth and mix. And as we've called out in the food space, we're very comfortable that with the levels of volume growth that we're seeing in that space, particularly led by fresh produce and meat, but grocery also in a good spot. And then that's somewhat offset by some of the effects that we're seeing in the non-food space.

And Michael, just on a PCP basis, so just a reminder, we are cycling a very strong growth from 12 months ago as well. So if you're looking at it on a PCP basis, you need to take that into account.

The next question comes from Craig Woolford with MST Marquee.

Just a question on the sales impact you may be having from theft. Some of the feedback we've had is that some products might be deranged and there's, in some categories, less facings on shelf for products that are being impacted by theft. So is there anything you could quantify and are you seeing anything on that front in terms of sales impact from theft?

Thanks for the question, Craig. I mean, I think that's not something material that we're calling out in the whole scheme is the equation that we've got on loss overall. I mean, definitely, we included in the full year as part of what we had as one of the points of the plan is to have a look at what is the right range by store. -- and that's across a variety of categories. So we definitely see higher levels of stock loss in areas like electric tooth brushes and makeup and skin care and things like that. It's certainly some stores that lend themselves to having a broader range than others in that area, and we are working on implementing that across the network.

Is there a figure you can share on what the price inflation in liquor is? Just trying to make a similar assessment on price and volume performance in liquor like we do on supermarkets.

I won't comment specifically, lag on it, but it's fair to say that inflation in liquor is running lower than it is clearly in food. In terms of the makeup of kind of sales growth, we are obviously, like a bit more discretion clearly a bit more discretionary than food. We've had sort of what I'd call very modest volume growth and a large part of the growth is actually coming from ASP, which is driven by inflation. So hopefully, that sort of helps answer that question.

So just to be clear, the comp was 0.1%. -- surely ASP growth was...