Coles Group Limited (COL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Coles Group Limited 2025 First Quarter Sales Results Call. [Operator Instructions] I would now like to hand the conference over to Ms. Leah Weckert, CEO. Please go ahead.

Thank you, and good morning, everyone. Welcome to our first quarter sales results for 2025 financial year. I do hope you're all well stocked up on your Halloween trick or treat suppliers and getting out to experience it tonight. Before I begin, I would like to acknowledge the traditional custodians on the land on which we meet today, the Wurundjeri people of the Kulin Nation. We acknowledge their strength and resilience and pay their respects to their elders past and present. So today in the room, I'm joined by Charlie Elias, our CFO; Matt Swindells, our Chief Operations and Sustainability Officer; Anna Croft, our Chief Commercial Officer; Ben Hassing, our Chief Digital Officer; Mike Courtney, our Chief Executive of Liquor; and Amanda McVay, our Chief Customer Officer. Before I open up to Q&A, I will make some initial comments on the results. I'm pleased to report solid growth in the first quarter with group sales revenue growth of 2.9%, $10.5 billion. In supermarkets, sales increased by 3.5% with comp sales growth of 2.4%. We delivered positive volume growth driven by our Value campaigns, our Winter of Sports giveaway campaign as well as our exclusive brand portfolio. Liquor sales were flat in the quarter. Headline sales did benefit from higher space growth following the acquisition of the 20 stores in Tasmania as well as the timing of events, particularly the [ AFL ] Grand Finals. However, we were also impacted by the continued transition away from less profitable bulk and affiliate sales during the quarter and the CrowdStrike outage in July. Overall, we've been working hard to deliver value for Australian families, and we remain very focused on this throughout the quarter. This was seen through exclusive to Coles revenue growth of 4.5%, a positive customer response to our winter and spring value campaigns as well as our other investments in value across the portfolio, including into Own Brand cheese and everyday staples in the Coles Simply range and also through our loyalty program, we saw Flybuys active members grow by 4.1% with more than 20% growth in members participating in personalized value offers. Pleasingly, for customers, we saw deflation in meat, dairy, health and beauty and home care categories during the quarter. And overall supermarkets inflation, excluding tobacco, declined to 1%, remaining well below historic levels. Supermarkets e-commerce sales continued to grow strongly with 22.4% growth with continued improvements in online NPS. And as you can probably work out, this implies that we're seeing good growth from our stores around 1.6%. We're also really pleased with the early results following the opening of both our Victorian and New South Wales CFC. We're slightly ahead of schedule, and we expect to complete the transition of orders by mid-November. The early positive outcomes across a range of customer experience metrics, including availability and the perfect order rates have been very encouraging. Looking ahead, in the early part of the second quarter, supermarket sales revenue has remained broadly in line with the first quarter. And volume growth is supporting this with investments that we've continued to make across the portfolio to help support families in the lead up to Christmas. In liquor, sales revenue growth remains subdued and the business is focused on making sure we've got a compelling value proposition for the festive season. Now before I hand back to Q&A, you will have seen the other announcement we lodged with the ASX today, with regards to investing $880 million to construct our third ADC, which will be located in Truganina, Victoria. We're really excited about this further investment in technology, which will enhance product availability for our customers and also improve efficiency across the supply chain. The project is expected to commence this financial year. And as a result, we are expecting our capital expenditure in FY '25 to increase to approximately $1.3 billion. And with that, I'll now hand back to the operator for Q&A.

[Operator Instructions] Your first question comes from Tom Kierath with Barrenjoey.

I suppose the obvious one, just to ask on promotional intensity and changes in consumer behavior. Obviously, Woolworths flagged some changes in the market yesterday. Just be interested on what you're seeing on that front. Obviously, any numbers would be appreciated, but I appreciate it's a sales call, so that might be difficult.

Yes. Thanks for the question, Tom. So if I take a step back and maybe start with the customer behavior side. So I would say customer behavior has been evolving pretty dynamically now for the last 12 to 18 months. And you've probably heard me talk about this on the last few results calls where we talked about 90% of customers are changing their habits. We've got a lot more shopping around. And to just put some numbers around that, if we went back 12 months ago, the average Australian family were shopping in four food retailers every 4 weeks to fulfill their basket. 12 months on, that is now 7 to 8 food retailers across the 4-week period. And actually, we've now about 95% of Australian families shopping at three or more retailers for food every week. And so that cross shopping has been stepping up, very consistently across the last 12 months. We've also been seeing customers much more focused on promotions and loyalty offers and definitely seeking those out, and they've been trading into more affordable options. And that's why we're seeing such strong growth in Own Brand over the last period -- the last 12 months really as a period. But none of this is new for us. We've been sharing this quite openly in our results calls now over the last 12 months. And I would say, as this has been unfolding, we have been adapting our approach as we go. And so I mean, if I look at the promotional intensity that we had in this last quarter, it was slightly up on Q4, but it was slightly down on Q3 last year, and it was almost completely in line with Q2 last year. So actually, if you looked across the average of the last 12 months, this promotional intensity that we saw in the last quarter is not sort of materially outlined with what we've seen over the last year. I would say that in the last 12 months, we, from a strategic perspective, have been very focused on what we need to be going to provide a really compelling value offer. And part of that is we have focused in on promo effectiveness, and really looking at getting behind fewer, bigger promotions that really make impact for the customer. And so that means looking pretty hard at a lot of their promotions that sit in the tail and don't really add a lot of value for the customer, but actually drive a lot of complexity into the business for us. We've also been replacing our mass loyalty offers with much more personalized offers, which means we're getting a lot more effectiveness in terms of the loyalty spend as well. And we've been quite strategic about where we've chosen to invest into price. And one of the ones I'd call out on this is the investment we made into 1 kilogram cheese block. In the Own Brand range during the quarter, where we took it from $13.90 to $9.50. It's a really important line for customers, it really cuts through as an offer, and we can put big volume behind it and really drive sales through a promotion like that. So when I put all of this together, what we're really trying to do is to make it easier for the customer to find value that is relevant to them. but we're also really optimizing the investments that we are making into that value so that where we are putting it, we're actually getting impact. And so that has been our strategy now for the last 12 months, and we are continuing to do that. So your sort of your question around it's a sales call, not an earnings call. It is a sales call, and I won't provide any guidance. But I would probably go back and reiterate what we've shared at the full year result, which is -- we have a number of cost headwinds coming into this year. We've got the increasing wages. We've got step-ups in DNA and implementation costs related to the transformation projects. But we also have been very clear that we want to make sure that we're competitive. And as such, we will need to make investments over the course of the year. But on the positive side of all of that, to deal with those cost headwinds, we have been putting in place now for the last 12 to 18 months a program of activity which really frees up capacity for us to navigate that. And so you've got the Simplify and safe-to-invest program, $1 billion out in 4 years. We took $238 million out last year. And we are making good progress in the first quarter in the sense of our target for this year. We've got the work we've been doing on loss. It's no secret to any of you on the line that -- you went back to this time last year, and we had a significant issue with loss. We put in place a very comprehensive plan to address that and the exit rate that we achieved coming out of FY '24 was very strong. And if we just maintain that exit rate for the whole of this year, then that gives us a significant tailwind. But that's certainly not our intention. Our intention is to continue to improve that. You then also got the benefits we're seeing come through because of the ADC. Now they're twofold. We're getting better availability, which is helping to support sales but we're also starting to see the efficiency benefits flow through, and we expect to be reaching full run rate of those in the second half. And then you've got Coles 360, which we're continuing to grow. And then probably the other one I would chuck in is we're really focused on execution, which is just make sure every event is executed well, which is why you heard me start with Halloween. Now that suite of activity, none of that should be new to you. We have been very open in sharing that, that is our plan, and that is enabling us to have capacity to deal with the headwinds that we have coming into the business.

Your next question comes from David Errington with Bank of America.

Leah, this probably will be a question for Charlie and maybe Matt. But I'm really interested today why you announced -- or the announcement of the new DC. I'd like to know what advantage this is going to bring to Coles? I was hopeful that we're getting toward the end of the capital intensity that we're putting into the industry. But obviously, this is hopefully going to provide you with some benefits. But I was hopeful also we're past the headwinds or the headwinds of the increased costs of implementation of these DCs. So if Matt and Charlie could basically give us a bit of insight as to what this new DC in Victoria is going to bring to Coles and when things are going to start impacting, that would be really appreciated.

Thanks, David. It's Matt here. I might start and then hand to Charlie for some of the financial components of it. But in terms of the plan itself, this is part of our overall supply chain network and strategy. The timing is very considered. The benefits that we see relate really to safety, they relate to better availability, and they clearly relate to a more productive structural advantage that we see in the market. Now Witron remains the #1 automated solution provider globally. They continue to work with key partners around the world on repeat business, and we still believe that, that is a structural advantage for us in terms of cost. And now this facility itself, it is slightly bigger. The capacity requirements are about 15% more. So it's not exactly the same as Redbank and Kemps. That does mean it's a bigger program of work with a higher cost and a slightly longer period of time. But fundamentally, the operating system is pretty much what we've got in Redbank and Kemps, and we are really pleased with the progress that we've made on realizing those benefits in line with the business case, and we want to continue to take this kind of technological advantage and then optimize it further over time. So I think from a strategic perspective, it ticks all the boxes. We've now done two of them. It's the same teams that will work on the third, and we'll continue with the playbook and bring the Victorian site online. So that essentially covers our Eastern Seaboard grocery volume, which is where we the best and the most optimal component of our supply chain volume through that technology. But Charlie, do you want to talk to the number...

Thanks, as Matt said, look, I'm really excited about what this actually does bring, as I said, now this actually now, as Leah said in her opening remarks, automates our ambient supply chain across the Eastern seaboard of Australia, including supporting the network in WA and NSA. And you've already seen -- we've already called out the availability benefits, et cetera. But if I can just focus on the CapEx, so our CapEx for this year, as we've guided, CapEx will increase from $1.2 billion to $1.3 billion. Let me just take you through the profile though. So as similar to the previous two projects, what we do expect is about 3/4 of the CapEx profile sort of years 2, 3 and 4. And then you've got effectively the balance either side in year 1 end and year 5. So we don't take this decision lightly. We're really confident in the benefits that these are going to bring to Coles and our supply chain costs.

Following up, Charlie and Matt and maybe Liam might want to bring in here. One thing I've been watching and a bit concerned about is the fall off of sales in store. Now Leah, you called out that growth in store was good, but it was only 1.6%. Yesterday, Willie's, I think sales in store was 0.7%. So there's a clear shift away from shopping in stores. But now you're getting a fairly hefty increase in kit, if you like or capital to support the stores at a time where the store sales are pretty low. I'm just a bit worried about the sales in store decline and what you can do to arrest it, and whether this CapEx is going to be justified given the trend of sales in store.

Well, this investment, it doesn't just help us support sales in store. It help us to support sales across the whole of the channels that we offer to customers. So these facilities will actually supply the CFCs. We still have our stores who are fulfilling our Click&Collect orders and our Same Day orders. So the benefits that this brings is across the entirety of the omnichannel offer for the customers.

So there's no problem. So you're not worried about the drop in the sales in stores that's going okay?

I think we're comfortable on where we are, overall. I mean we definitely think about the customer as an omnichannel customer at the moment. And the vast majority of our customers shop both online and in store. And we want to make sure that we continue to offer them a suite of options that they've got, which suits the mission that they are trying to fulfill on that day.

And if you go back to, David, the 10.8% of penetration with respect to a common, remember, we've pulled out historically. So it's not a new number, but yes, 40% of that is obviously Click&Collect, right? So in-store for field sales out of our stores, et cetera, as Leah said. So this does help fulfill the mission across all those shopping missions of our customers in all our channels.

Your next question comes from Adrian Lemme with Citi.

Look, I mean, just following up on from the question just there from Aron. I am interested in your perspective on Click&Collect [Technical Difficulty].

Adrian, we just lost you. Would you mind starting the question again?

Yes, apologies, Leah. So I was just following on from Mary's question actually about online and Click&Collect. I'm interested in your views because I've heard Willy's views on this, but interested in why there's no price signal on a standard Click&Collect or a like there is delivery. It's clearly growing in preference for people, and I think it's a really good value as a customer myself to save an hour of my time doing a Click&Collect order rather than shopping in store. What do you think about putting some sort of pricing on it to help recover the costs, please?

I'm going to pass over to Ben to address this one.

Yes. Thanks for the question. As Leah mentioned, we take an omnichannel approach -- and so actually, you went back a few years, a lot of customers felt the pricing we had in store was different from the pricing that we offered with Click&Collect. And so over the last few years, we've gotten really consistent in the strategy on execution for both price and promo. Because, as Leah said, majority of our online customers, they shop in store as well. So really, it's kind of the convenience aspect of click and collect is the natural draw and we don't need to make significant investments to move customers across. We're meeting them where they're at and where they want to be.

Okay. My concern is that it's growing in penetration for both Woolies and Coles and there's a lot of the personal shoppers in store shopping for these, and that's the labor cost for both of you. So I guess that's my concern. Can I just ask 1 quick follow-up also from Arrow on the ADC. I know you mentioned it's got 15% extra capacity. I think on average, it's costing 70% more than Queensland and New South Wales if you average the spend on those two. Is the existing cost base in the Victorian distribution network a lot higher such that the return might be similar? Or should we expect a lower return on this one than the first two, please?

Yes. So Adrian, thanks for the question. So let me just address the question on the [indiscernible] program. As Matt earlier said, it is -- this is our larger facility. It's going to handle 4.6 million cartons, a week compared to the other facilities, which works 2.8 million tons. This is going to cover an extended catchment as we said, in Victoria, not only Victoria -- but tasmania, also into South Australia and WA. So this is a large facility. Also, you got to remember that the previous projects were actually signed 4 or 5 years ago. So it's clearly been an inflationary environment over the last 4 or 5 years as we know, and that's impacted. So we are very confident that with the investment that we're making in this facility. We're very confident of the returns and the benefits that this facility is ADC will bring to Cloes. It's too early to talk about what those benefits are. But yes, from our perspective, we're really confident and the reason we're making that investment and announcing that investment today.

Your next question comes from Michael Simotas with Jefferies.

I've got a couple of questions, if that's okay. The first one is just a follow-up on the promotional environment and competitive landscape. So clearly, Coles is doing a good job to improve promotional effectiveness. Can you make some comments on what you're seeing in the market? Have you seen a step-up in promotion, whether it's effective or not from other players? And do you think that there is a risk you'll need to respond to that?

Anna here. I think what we are seeing is the broader market playing very competitively, and we're now tracking a broader range of competitors than we were 12 months ago to make sure that our customer offer in every single category is competitive, and we continue to offer the customer the full shop and the ability to do that. And I think what we are seeing is in our own strategy around actually how do we simplify our offer, and focus on execution, what we are seeing by running fewer promotions in store year-on-year, we're actually seeing that with better execution, more cut-through for customers. But that can't happen on it's own. What we are doing is coupling that with the strategy in each of the categories, which is really focused on entry price points to make sure that customers have no reason to go anywhere else, but also incredibly good tiering in every category that we can manage through good, better, best. And we're seeing, obviously, the results come through in fine that's up 8.9% as a result of that. So I think it's not just promotions alone. It is the entire customer offer and the value prop we're focused on. But there is no doubt there are certain areas of the market we are seeing very competitive activity. If you just look at nonfood, that has gone into deflation, and we're very conscious around how do we respond and adapt to or offer in the appropriate way that is sustainable long term.

I think I'd just add to that, Michael, that we obviously monitor our promotional position every way, pretty closely. And we're satisfied with where we are sitting against key competitors on that front at the moment.

Okay. Those comments are really helpful. And then the second one I've got is on the Truganina ADC. I'm not expecting definitive numbers, but how should we think about implementation costs for this and you've called out a $35 million provision that you'll take in the first half. I presume that's not the extent of the implementation costs given significant costs that we saw with the other two facilities. So should we expect a reasonable chunk of cost to come through the P&L for the next few years above the line relating to this?

Thanks for the question, Michael. So there's a couple of things and I'll address that. So firstly, in terms of the provision. You're right, that is not in the implementation cost. That is a one-off cost around site closures and site reconfiguration cost, as you know, this involves three sites. It involves the Somerton site, the Truganina site that we currently have and a site in Tasmania. Yes, it's intended that Somerton and Truganina sorry -- and Tasi would close and the Truganina site would be repurposed into a primary consolidation center. So that's a one-off cost. We're calling that out. And so that allows you to sort of model that through. In relation to implementation costs, there will be implementation costs that come through, but predominantly not in FY '25. So we'll give you further guidance with that going forward as we did with the other Witron and the CFC programs going forward. Can I just use this opportunity to earlier, I did actually say that what the other two facilities were 2.8 million tonnes at a carton, that's not correct. It's actually 4 million cartons by replacing facilities that we're doing 2.8 million cartons. So the 15% step-up, if you like, in larger facilities, it's from 4 million to 4.6 million cards per lease.

Your next question comes from Ben Gilbert with Jarden.

So I was just following up on a prior question, Joe, because we're all probably going to have a crack at trying to put in the cost for '26,'27. Should we be thinking $60 million, $70 million a year of additional D&A for a few years. I'm just cognizant that it's obviously it's noncash in theory, but it's kind of be in probably some wide ranges that people think about trying to guesstimate where it's going to fall for '27,'28 for the numbers?

Look, Ben, thanks for the question, Ben. There's a couple of things. Firstly, it's to early to pull any DNA. That's like 5 years away. So outside of D&A impact in relation to the implementation cost spend, Ben. As I said earlier, we'll make that call closer to in terms of what those implementation costs will be on a year-over-year basis as we did with the other facilities.

Okay. But it's essentially going to be a cost of running duplicate facilities that will be taken above the line in CDB and then think about the D&A when it comes in as it comes online.

Yes, yes, but that's 5 years away, Ben.

Yes. I mean that's definitely at the back end of the profile that we would see the D&A impact start to come through. So essentially what Charlie's saying is in FY '25, we are not pulling out any material implementation costs. There is the step up in the CapEx and that mostly relates to milestone payments that we make with Witron. So think ordering kit, paying for steel, all of those sorts of things. And as we get towards next year, we'll start to give you some insight into what the implementation costs on the next couple of years are.

All right. That's helpful. And just a sort of question for me. Just in terms of consumer behavior and some of those stats that you provided at the start there, which are really helpful. Is this changing how you need to think fundamentally around cost and serving the consumer because it just feels like average basket sizes are coming down. And as we sort of look forward, what -- how do you think you need to continue to readjust just the business? Do you need to focus more on costs. You put more into loyalty. I'm just wondering how you start to get those basket sizes up. You've just done a great job maintaining profitability as they have contracted. But obviously, the goal would be to look to grow those moving forward.

Yes, it's a really good question. I mean from our perspective, in terms of that customer behavior, the shopping across retailers right now is meaning that we just have to be very focused with every week's offer to make sure that it resonates. And certainly, our ambition every way is to get as many customers as they can come and do the big basket shop with us. And so we're very focused on making sure to Anna's point, when we're designing the promotional programs that we have a good mix of products within that at really good discounts that will fall into those big baskets. So we are the first point of call for them. Yes, there's no doubt we are going to continue to have to focus on cost going forward. And that's why things like to simplify and save program and the work that we're continuing to do to drive down loss are just so important for us to make sure that the team is really focused on those initiatives in parallel with what we're doing on the sales side and really optimizing the offer.

Do you think you're winning share of main shops at the moment?

I think at the moment, if we took -- I mean, obviously, last year, we think, overall, we took some share. I think that this year, year-to-date, I'd probably describe it as we're holding our own. I mean I would say the winners in the market at the moment are ALDI and probably to a lesser extent, some of the really value-focused specialists like [indiscernible] fruit and veg stores and the like. And so we are very focused on how our offer stacks up there, which is exactly why you're seeing us making investments into areas like Cole Simply and some of the really big value basket lines like Cheese.

Your next question comes from Caleb Wheatley with Macquarie.