Coles Group Limited (COL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Coles Group Limited FY '26 Results. [Operator Instructions] I would now like to hand the conference over to Leah Weckert, Coles Group CEO. Please go ahead. .

Good morning, and thank you for joining our full year results call this morning. Before I begin, I would 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 power respects to their orders past and present. I'm joined in the room today by Charlie Elias, our CFO; Matt Swindells, our Chief Operations and Supplier Chain Officer; Anna Croft, our Chief Commercial and Sustainability Officer; Michael Courtney, our Chief Customer Experience Officer; and Claire Lauber, Chief Executive of Liquor. Moving now on to Slide 3. FY '26 was another year of strong execution, where we strengthened our competitive position and grew market share in supermarkets. Excluding significant items, group EBIT increased by 9.9% and NPAT increased by 13.7%. Digital was again a standout, with supermarkets e-commerce sales increasing by 26.4%. And importantly, our customer fulfillment centers delivered positive EBITDA in our second year of operation. We delivered $311 million of simplifying safe-to-invest benefits, helping us continue to invest in value and the customer experience. And what is particularly pleasing is that our financial performance looks the company by further improvements in customer satisfaction and our highest ever team member in cation score. We have also announced targeted investments in our next phase of growth. This is across new stores, online and technology, coupled with a clear strategy to improve the performance of our liquor business, and I will talk to this in more detail in my presentation. Moving on to Slide 4 and the financial highlights. We reported group sales revenue of $45.6 billion, an increase of 2.8%. As I just mentioned, excluding significant items, group EBIT increased by 9.9% and NPAT increased by 13.7%. In supermarkets, sales revenue, excluding tobacco, increased by 5.1%, and Supermarkets EBIT increased by a very strong 12.2% underpinned by top line growth and EBIT margin expansion of 43 basis points. Charlie will talk more to the financials in his presentation. Moving on to Slide 5. The common thread through these results is the consistent execution of our strategy. Our customer proposition is resonating. We have continued to invest in value exclusive to Coles is performing strongly and customer satisfaction has improved. Our e-commerce business is scaling profitably with strong e-commerce growth positive CFC EBITDA and continued improvements to the customer proposition. Our productivity programs are allowing us to convert that growth into earnings with EBIT growth significantly ahead of sales. and our strong cash generation and balance sheet gives us the capacity to reinvest in the business and pursue the next phase of growth. During the year, we reached our strategy for our flywheel to reflect the increasing importance of nonfood everyday essentials beyond food and drink and the growing role AI is playing across our business. The fundamentals of our strategy, however, remain consistent. Let me take you through the progress we were making, starting with destination for, food drink and everyday essentials on Slide 6. We know value remains front of mind for Australian households and delivering value for our customers remains one of our highest priorities. During the year, we continued to strengthen our value proposition in a number of ways. We expanded our Everyday Value range with more than 5,600 products now providing customers with consistent value whenever they shop. And at the same time, we have been simplifying our promotional program around fewer, bigger and more impactful offers. This is about making specials truly special and at the same time, making execution simpler for our customers and our team members. Our seasonal campaigns and continuity programs continue to resonate strongly, and we are increasingly using flybuys and our digital capabilities to deliver more relevant and personalized value. Our Exclusive to Coles portfolio also remains a key differentiator for us to making shopping more affordable. We saw growth ahead of the rest of stores. Importantly, we're delivering value across all price tiers while continuing to offer the quality products our customers expect from Coles. Let's discuss this in more detail on Slide 7. Exclusive to Coles delivered sales growth of 6.1% and with coal sinus continuing to perform particularly well, with sales increasing by 9.2%. Exclusive to Coles plays an important role in both our value proposition and differentiation. We want to make shopping more affordable for customers. And we also want to create a range of products, value for their taste or functionality that are only available at Coles, providing a reason for customers to choose to shop with us. That means focusing our innovation, where we believe we can lead and where there is an opportunity to offer something genuinely compelling. We see particular opportunities in health and convenience and saw strong momentum from our perform high-protein convenience mills this year. We also saw strong growth in our ultra cleaning range in nonfood. Quality and innovation remain at the heart of the portfolio. and it was great to see our products recognized with 4 awards, including 17 product of the Year awards. We've also expanded our exclusive partnerships with leading plans, including M&S, [indiscernible]. These partnerships, together with our innovation, broaden our offer and give customers more reasons to choose Coles. Moving on to Slide 8. As I said at the start, one of the outcomes I was most pleased with this year was the improvement we saw in our customer satisfaction metrics. It is great to have seen a step on in all of the important metrics of quality range, availability, price and store look and feel for the year. For me, the important takeaway is that customers are noticing the changes we are making. Our investments in value, quality and range, together with improvements in availability and execution in our stores, are translating into a better customer experience. There is always more we can do, but the breadth of improvement across these measures gives us confidence that our customer proposition is moving in the right direction. Moving on to Slide 9 in accelerated by digital. Our e-commerce business had another very strong year with supermarkets e-commerce sales increasing by 26.4% to $5.6 billion and penetration of 13%. We delivered double-digit growth across all our fulfillment channels and building a differentiated offer across the full range of customer shopping missions. Whether that be through our CFC, which provides the best -- our customers with our best online availability, guaranteed shelf life and a high-quality next-day and same-day delivery proposition, and customers can even shop later at night now for delivery the next morning, or whether it's customers looking for immediacy, our expanded partnership with Uber Eats gives them access to around 70,000 products. This is the largest growth range available through an on-demand delivery platform in Australia. We also continue to expand Windowless Rapid, Click & Collect and saw strong growth in our coals and collusive subscription. And we've also seen some very good improvements in click and collect wait times. Importantly, our e-commerce business is not only growing strongly, but it is scaling profitably. We have delivered this through improvements in peak and last mile delivery efficiencies as well as growth in our Coles 360 retail media business. We are also really pleased to report that our fares are EBITDA positive, which I'll talk to now on Slide 10. Customers are responding positively to our Deliver More proposition. With strong volume growth and CFC NPS significantly ahead of total online MPS. Sales through the CFCs grew by more than 30%, ahead of overall e-commerce growth. as we expanded catchments and introduced same-day delivery. We also continued to improve the economics with CFCs achieving positive EBITDA for the year. This was achieved through high volumes, together with operational improvements, including on-grid robotic pickups, auto frame loading and auto bagging, which were all installed during the year. This is an important milestone in only the second year of operation and it demonstrates that we can deliver a better customer proposition while at the same time, improving efficiencies as the business scales. Moving now on to Slide 11. Our digital assets and flybuys loyalty program give us an increasingly powerful ability to connect loyalty, e-commerce and retail media. We know our customer value offers that are relevant to them rather than simply receiving more offers. During the year, we continued to enhance our digital functionality and increased personalization across the customer journey. Features such as New For You and My Weekly Specials are making it easier for customers to discover products and value that is relevant to them. At the same time, our customer data capabilities are helping us create more connected experiences across our app, websites and stores. Coles 360 is becoming a more important part of the business. We know that refined in Australia is a large and growing market. In stores that might be digital screens, as material or Coles Radio. On site, it is banners, tiles and videos in the app and on our website. Off site, it could be trip and social media. The goal for us is to make the right value marble and help suppliers connect with customers in ways that are useful, relevant and trusted. And this is an important area of growth for us. Moving on to Slide 12 in our Simplify and Save to Invest program. Our Simplify and Save to Invest program remains a core part of how we operate. We delivered for $311 million in benefits in FY '26, taking cumulative benefits since FY '24 to $876 million, and we remain on track to exceed $1 billion of benefits by the end of FY '27. If we look further back, we have now delivered around $1.9 billion of benefits since FY '20 through FSI and our previous Smarter Selling program. This demonstrates the consistency of our approach to productivity. These savings are important because they help us offset inflationary and other cost pressures while creating capacity to reinvest in value, our stores and our digital capabilities. And increasingly, data, technology, automation and AI are helping us identify new sources of productivity. Moving on to Slide 13. AI is already well established across Coles and delivering value in many parts of our business. What has changed recently is the pace of capability and the breadth of where we can apply it. Coles has a unique combination of data and physical assets, millions of customer transactions every week, more than 1,800 stores, 8,000 suppliers, 115,000 team members and 10.3 million active Flybuys members. And we are increasingly bringing together those capabilities to improve outcomes for customers, our operations and our team members. For customers, AI is helping us to improve personalization, product discovery and the relevance of our offers. The next wave is conversational shopping and agentic commerce. Over time, we see the potential for customers to engage with us in a much more intuitive way from discovering what they need through the transacting and receiving cost purchase support. Given the scale of our customer relationships, by buyers and our digital channels, we think this is a particularly exciting opportunity for Coles. Across our operations, AI is already embedded in our decision-making in areas such as forecasting, space and rent optimization and inventory and store decisions. We are building towards end-to-end optimization across our supply chain, bringing together decisions across inventory, DCs, transport and replenishment so that increasingly, we can optimize the system as a whole rather than individual decisions in silos. And for our team members, we are using AI to make everyday task simpler and more adaptive. The next opportunity is to move beyond individual productivity tools towards function-specific agents and AI embedded directly into everyday wear both. This will help our team members spend less time on repetitive tasks and more time on the work that creates value. Overall, we remain disciplined about where we will deploy AI. Our focus is an area where we can meaningfully improve customer experience, availability growth and efficiency, and we're excited about the opportunities ahead. Moving on to Slide 14. Alongside our financial performance, we remain very conscious of the role that coal plays for our team members, suppliers and communities. We achieved our highest ever member engagement scores during the year, facing Coles in the top quartile against the Australian benchmark for the third consecutive year. We continue to support our suppliers and growers with more than 97% of our fresh produce sourced from Australian growth, and we awarded more than $3.5 million in grants through the Coles Nurture Fund during the year. Our community partnerships also remain an important part of who we are. Coles contributed $45 million in community support in addition to the equivalent of 40.9 million meals donated to SecondBite and Foodbank. And we continue to progress against our sustainability priorities, including an 82.6% reduction in Scope 1 and 2 emissions from our FY '20 baseline. These outcomes reflect the commitment of our team members right across Coles. Moving on now to our strategic update. Over the past 3 years, we have invested significantly in transforming Coles. As we look back at the priorities we set 3 years ago, we can see tangible evidence that the time and resources that we have invested is delivering outcomes. And over the past 3 years, we have materially strengthened the business. Starting with our customer proposition. Exclusive to Coles has continued to grow and differentiate our offer, while coal fines has delivered particularly strong growth. We have enhanced value through the introduction of more everyday value products and reduced promotions, making it easier for customers to find value in store. At the same time, we have seen customer satisfaction improving across all key metrics. In digital, we have significantly different business to where we were 3 years ago. eCommerce sales have more than doubled. Our 2 CFCs are now fully operational and delivering strong returns, and we have a market-leading immediacy offer and have made meaningful enhancements to our app and website to improve the customer experience. At the same time, we have transformed our ply chain with our 2 ADCs now fully operational, which are delivering improvements in the availability and cost efficiency and an optimized store network. So when we look across the business today, we have a stronger customer proposition, a much larger digital business and a more automated supply chain and a more productive operating model. Moving on to Slide 17. Importantly, the strategic progress that we have made has translated into strong financial outcomes and improved returns. Since FY '23, sales have grown at a compound annual rate of 4%. Over the same period, EBIT at 7.7% per annum. Return on capital has increased by around 80 basis points to 17.3%. That is important, as our objective has never simply been to grow the size of the business. We want to deliver sustainable earnings growth and attractive returns on the capital we invest. The combination of customer leverage and disciplined productivity has allowed us to grow earnings faster than sales while continuing to reinvest in the business. And it has been underpinned by disciplined capital allocation, including consistent growth in dividends which have increased from $0.66 per share in FY '23 to $0.78 per share this year. Moving on to our capital allocation framework on Slide 18. Over the past 3 years, we have, on average, converted more than 100% of earnings into cash while investing around $1.1 billion a year in our 4 businesses across maintenance growth and efficiency. At the same time, we have maintained a strong investment-grade balance sheet, giving us capacity to invest through the cycles. That financial strength has enabled us to complete our major ADC and CFC investments, pursue strategic acquisitions including our acquisition of MilkCo and several strategic property investments and progressively increased dividends while retaining flexibility for further shareholder returns. Looking ahead, our approach will remain unchanged. We invest where we see active returns, maintain balance sheet strength and return surplus capital to shareholders. Moving now on to Slide 19. With the transformation platform we've built over the past 3 years, now well established, we're moving into the next phase of targeted investments. This isn't the entirety of our strategy, and we are looking forward to sharing more at our Investor Day later in the year, but I wanted to provide some insights this morning on where we are investing for future growth. First, our Victorian ADC. The $880 million investment remains on time and on budget. Once operational, it will have capacity to process 4.6 million cartons a week and complete the automation of our ambient distribution network across the Eastern Seaboard. Secondly, stores and technology. We plan to invest an additional $300 million by the end of FY '28, supporting around 45 new supermarkets, largely in infill locations in high-growth corridors and around 150 renewals. These investments will allow us to augment our store footprint, improve the customer experience, create more capacity for online fulfillment and make our stores more efficient. We'll also continue to simplify our technology and expand the use of AI-enabled capabilities. Thirdly, liquor. FY '26 performance was below our expectations. We have completed a strategic review and have established a clear plan ahead. We will be focused on creating a more integrated food and drink experience across loyalty and e-commerce optimizing the store network with greater emphasis on supermarket co-locations and simplifying the operating model. And finally, the Coles Capability Center. Our expanded partnership with Accenture will give us access to woo skills and technology at greater scale and pace. It will help accelerate technology delivery and create a more efficient operating model. benefits are expected to begin in FY '27 and build to an annualized run rate of more than $100 million by the end of FY '29. Together, these investments are focused on improving our customer offer, creating capacity for growth and levering productivity benefits and attractive long-term returns. We have a strong balance sheet, and we'll remain disciplined in how we allocate capital by ensuring we continue to deliver a competitive offer that meets the needs of our customers. I will now hand over to Charlie, who will take you through the financials in more detail.

Thank you, Leah, and good morning, everyone. I'll now take you through the group financial results in more detail. Overall, we are pleased with the financial performance of the group in FY '26. The result reflects continued sales momentum in supermarkets, strong operating leverage, disciplined cost management, while at the same time, continuing to invest in value for our customers. Moving on to Slide 21. We reported group sales revenue of $45.6 billion, an increase of 2.8%. Excluding significant items, group EBITDA increased by 7.1%. Group EBIT increased by 9.9% and NPAT increased by 13.7%. Importantly, earnings growth was well ahead of sales growth, reflecting the strong supermarkets performance, operating leverage and continued across the cost. The Board declared a fully franked final dividend of $0.37 per share, taking total dividends for the year to $0.78 per share. This represents an increase of 13% compared to FY '25. Moving to the segment overview slide on 22. Starting with supermarkets. We had a very [ strong year ] with EBIT increasing 12.2%, reflecting strong top line growth, capped with 43 basis points of margin expansion. Sales revenue increased by 3.7%, successfully cycling the impact of the competitor industrial reaction in the prior corresponding period and achieving market share growth for the year. Excluding tobacco, sand revenue increased by 5.1%. Our strong EBIT margin expansion was driven by improvements in both gross profit margin and cost of doing business as a percentage of sales. the year, our GP margin increased by 37 basis points and CODB as a percentage of sales improved 6 basis points. The [indiscernible] result reflected the annual size benefit from our ADC program, and a significant decline in tobacco sales following the legislative changes at the beginning of the year. Both of these were weighted towards the first half. Going forward, we would not expect to see material benefits to gross margin from tobacco given that we have reached a more stabilized level. We also continue to see benefit from strategic sourcing and SSI initiatives, as well as the growth of 360 media income. Pleasingly, these benefits were able to successfully offset the meaningful investments we made in value throughout the year. including red made as well as incremental fuel cost in the second half as a result of the geopolitical tensions. In terms of cost of doing business, again, pleasingly, our SSI program went a long way offsetting our inflationary cost pressures this year with $311 million in savings and a majority being CODB related. And we also benefited from major project implementation, dual running and transition costs falling away, which assisted both GP and CODB. We are pleased with the continued strong growth in e-commerce sales, coupled with the ongoing positive margin outcome. Our ability to scale our digital business profitably is something we know you have been focused on, and we have continued to deliver on this. As Leah mentioned, over the last year, 3 years, we have doubled our eCom sales and grown our EBITDA margin by 90 basis points to 5.7%. This is a real achievement and reflects the significant benefits of our major transformation programs and a continued focus on SSI have delivered. As we look to the year ahead, we will be continuing to work hard on SSI and continue to deliver the benefits from strategic sourcing, growing and growing Coles 360. We know these programs are more before than ever with value being a key focus for our customers and inflation to coming through the cost base. We are also keeping a close eye on retail time given the current pressure on consumers as we know this remains in the industry issue. In addition to the above, we are really pleased we have announced the extension and expansion of our strategic partnership with Accenture to establish our Coles Capability Center, which will support the enhanced digital and technology capabilities greater operational efficiency and improved outcomes to the business. The strategic partnership is expected to deliver annualized cash benefits of over $100 million per annum by the end of FY '29, with one-off implementation and establishment costs of $190 million in FY '27. These costs are expected to be treated as a significant item. Importantly, this program is incremental to with a really strong payback as this program will do much more than just save costs, it will accelerate our opportunities and strengthen our competitive position. Moving on to liquor, where sales revenue declined by 3.3% and and EBIT declined by 47.8%. Sales were impacted by the cycling of the prior year benefits from competitor supply chain disruption, together with ongoing cost of living pressures and subdued consumer sentiment. Promotional activity across the sector is also elevated, particularly in the big box end of the market. Notwithstanding this, we completed our Simply Liquorland store conversion program and our convenience portfolio representing more than 90% of our store network delivered positive sales growth. Gross margin increased by 40 basis points, supported by strategic sourcing, promotional optimization initiatives growth in Coles 360 Retail Media and a disciplined approach to price investment. Liquor EBIT of $59 million was impacted by softer top line and a $20 million in one-off costs relating to simple legal and conversions. In other, revenue related solely to the product supply agreement we have with Viva Energy. The improvement in the other EBIT line primarily reflected the lower corporate costs, partly offset by higher net property losses. Turning to operating cash flow on Slide 23. Operating cash flow, excluding interest and tax, was $4.3 billion with a cash realization of 101%. Working capital was broadly neutral for the full year. Higher receivables were partially offset by increased payables, largely due to the impact of inflation on cost of goods, while inventory remained broadly stable compared with the prior year. The movement in provisions and other primarily reflects the flow provision, which is a noncash but recognized in EBITDA. Moving to capital expenditure on Slide 24. Gross operating capital expenditure on an accrued basis was $1.2 billion, a decrease of $76 million compared to the prior year. As you know, capital expenditure falls into 4 areas: store renewables growth initiatives, efficiency initiatives and maintenance. Within renewals, we completed 212 store renewals across our network, consisting 71 in supermarkets and 141 liquor stores. Within growth, we opened 13 new supermarkets and 16 new liquor stores while also continuing to invest in our e-com business. Efficiency initiatives include investments in store front-end service transformation, liquor easy ordering and our Victorian ADC. Maintenance CapEx included ongoing refrigeration, electrical, store and technology life cycle replacement programs. We continue to optimize our property portfolio with net property capital expenditure increasing by $162 million due to an increase in property acquisitions and developments and lower proceeds from divestments. Looking ahead, as Leah talked to, we are stepping up our capital expenditure this year to invest in a number of incremental strategic projects, including an additional $150 million in FY '27 and FY '28, in growth through opening 45 new supermarkets delivering a net space growth well in excess of 2%. The renewal of 150 supermarkets, increasing online capacity, enhancing the customer experience and priority technology to both improve efficiency and accelerate AI capabilities. The increase is not an ongoing step up in spend but a big reset of specific growth investments. We're also making excellent progress with our Victorian ADC, and the project is both on time and on budget and we'll complete the automation of our distribution centers down the Eastern Seaboard. The FY '27 CapEx for the Victorian ADC is expected to be approximately $300 million. So overall, inclusive of our core CapEx program, we are expecting operating capital expenditure for this year to be around $1.55 billion. Turning to balance sheet liquidity on Slide 25. Our funding position remains strong. At year-end, our weighted average drawn debt maturity was 4.4 years with undrawn facilities of $2.5 billion, while our lease adjusted leverage ratio further strengthens to 2.3x. We continue to hold investment-grade ratings of BBB+ with S&P Global and BWA Moody's. Combined with our strong balance sheet and cash generation, this provides the capacity to fund targeted growth investments, maintain financial discipline and continue returning dividends to shareholders. As I said earlier, the Coles' Board declared a fully franked final dividend of $0.37 per share, taking total total dividend for the year to $0.78 per share, a 13% uplift. As you can see on this slide, we have a healthy franking credit balance of approximately $550 million after the payment of our final dividend. To summarize before I hand it back to Leah, FY '26 was a strong financial year for the group. We delivered earnings growth ahead of sales, strong cash generation and an improvement in balance sheet metrics. This puts us in a good step to fund the next phase of growth for Coles. I'll now hand it back to Leah to take us through the outlook and concluding comments.

Thank you, Charlie. So turning now to our outlook on Slide 33. We enter FY '27 in a strong position, with supermarkets having gained market share and significantly improved customer satisfaction scores over the past year. Sales grew for the first 8 weeks of FY '27 was consistent with fourth quarter FY '26. In the first weeks of FY '27, sales minimum was well ahead of fourth quarter FY '26, with a temporary moderation during our competitors' collectibles campaign in late July and early August. Following the end of the collectibles campaign, sales recovered quickly back to levels consistent with fourth quarter FY '26. Our differentiated e-commerce offer continues to be a significant driver of growth with penetration increasing to 15.7% over the period. In liquor, the sales trajectory strengthened across the first 8 weeks relative to FY '26. Our convenience portfolio continued to deliver positive growth, while performance in the warehouse portfolio also improved. And with that, I'll now hand back to the operator for Q&A.

[Operator Instructions] Your first question today comes from Caleb Wheatley with Macquarie.

Just wanted to come back to the strategic initiatives you're pulling out in the 4 major areas there. Yes, I appreciate clearly there's a fairly meaningful step-up in CapEx as you look to invest in those but from a returns point of view, how should the market sort of think about the pathway for these investments and especially when how we should expect these returns to start to be realized in a tangible sense?

Yes. Thanks, Caleb, for that question. It's a great a question. pick those very clearly. Firstly, the ADC, I think you're probably pretty well versed on the ADCs going forward. As you know, that will come into train to FY '29, FY '30. This year, CapEx on that is $300 million. And then you know we've had a very disciplined way in terms of we allocate capital to those sort of programs. They are risk-adjusted returns on our cost of capital. and very clear how that drive benefits. If I think about the step up on the store program, we're talking about 45 supermarkets over the next 2 years. That is taking our net space growth to well over 2%. That's a significant step up increasing in terms of our capacity. We love investing in our stores. They are some of the best returning assets that we buy, very strong returns on capital. If I look at the renewals step up to $150 million, we did $71 million in FY at 26, and we are stepping up to 75%, but the nature of those things really important as any by the 150 or so that we're not talking about over the next 2 years is not just -- they're not standard. What we're looking at doing is increasing our online capacity and improving the customer experience in those stores. And we know, Caleb, when we -- if you recall, when we actually took the next-day home delivery volume out of the out of our Metro Melbourne and Sydney, when we freed up that capacity, it really did facilitate strong growth in our e-commerce business. So we're really excited about the growth that can unleash in eCommerce and in our stores. but also improve what we're doing. And what are we doing in those stores? -- improving things like staging areas refrigeration in the back of really ensuring that these stores can really deliver and cater things like click and let more bays, et cetera, that are really driving sort of growth. So again, we're really pleased with that growth. If you look at our performance on our capital, more importantly, we have been consistently investing at $1.1 billion ex the transformation programs. And what you can see over the last 3 years is our return on capital has improved over 180 basis points over that period. So I think a very strong returning set of CapEx.

Okay. Great. And then I guess a bit of a follow-up. I appreciate this is necessarily kind of a CapEx item, but perhaps a little bit surprised that for the Coles 360 or Retail Media have been as much of a focus there. I appreciate it's not you. I appreciate the income's up 55% this year called out over the past few years. But just sort of operationally and the sort of benefit you see that's driving on a go-forward basis? Just can you sort of understand where that are, both from a capability point of view, from a sort of inventory point of view and advertise and then sort of how you're thinking about that as sort of an investment on a go-forward basis?

Yes. Thanks for the question, Caleb. I'll start and then I might get Michael to give us a bit of color. I mean I think we were quite pleased with double-digit growth in Coles 360 space. We have continued to bring on more assets. We've improved our measurement capability through the year and really focused on ensuring that we're really listening to feed us on how we can lift ROI. That's been some big focuses over the last 12 months. And I think we're feeling like the business is really starting to get some momentum behind it. But maybe, Michael, you could give a bit of color to that.

Yes, happy to, Leah. I think the key word that both yourself and Caleb used is capability because this has been a year where we are continuing to build capability so that we keep scaling the business into the future. And Leah mentioned some of the areas where we bringing capability from a product aspect of whether that's ad server manager, whether it's reporting and measurement capability that we're being able to offer to suppliers because of what they've been asking for. So it may be some improvements in that space. I think the other area where we've been building capability over this year that we haven't spoken a lot about is in the people space as well. So back in September last year, we created -- we completed quite a big in-sourcing exercise. -- of some capabilities that previously sat externally had helped us scale the 360 business through the initial phase of growth but bring our capability in-house to have it closer to our planning. Our technology is going to help us accelerate in this next phase of growth. So just to finish up on that, I would echo lessen growing double-digit in a year where we're still rapidly building capability, I think, is a good result. I think it positions us really well for continued growth into the future in what is a large and attractive market for us.

Your next question comes from Peter Marks with Goldman Sachs.

My question is just on the July acceleration in the first few weeks. Is there a benefit from the Uber Eats exclusivity arrangement in that time frame? Or if not, what's driven that acceleration? If I can just touch on that because I guess if it's the Uber Eats benefit, that should continue into the second quarter, is the way I'm thinking about that?

Again, I'll start and then maybe ask for a bit of color from Michael. I think actually, as we came into the back end of FY '26, Peter, we actually saw probably a strengthening in the market. So June picked up again a bit versus where we've been in May. And then actually going into July, we saw a further pick up again. So there's definitely strength in the grocery market. at the moment. And certainly, that would align with some improvements that we've seen in consumer sentiment since April and May, where it sort of hits some low points. but also more and more customers telling us that they're eating more at home than they are out of home. So I do think that, that is playing a role there. That being said, as we've gone through these first 8 weeks, we have seen really strong strength in the online proposition. And I do think -- and you will have seen we've called that out in the outlook. But I do think that, that's starting to really highlight that we've got some areas of differentiation in there with regards to the deliver more offers through their customer fulfillment centers. but also through the Uber partnership, which is growing very strongly for us. Michael, did you want to just make a couple of comments on the partnership?

Yes, very happy to. We're very pleased with how the momentum in that offer continues to grow. If you're thinking about the sales impact of it, in terms of timing, I would think about it from the perspective of when we announced the deal, which was just prior to Christmas because what that means is that through the second half, really from the start of this calendar year, we've seen sales through our media offer and our partnership with Uber continue to increase steadily throughout second half. And that's a really good achievement when you think about at the start of this calendar year when we went from 2 platforms down to one. We first had to recover the sales that we were losing from the second platform. which we did successfully, very quickly and then continue to grow. So throughout the first half of this calendar year, we've continued to see benefits and I think that's a testament to what the strength of the partnership is because that expanded partnership with Uber, we think, gives us the market-leading offer in what is a very high-growth channel. Was it a market-leading offer because from a customer perspective, we think we've got the largest range in that space with over 700,000 SKUs where we're the partner of choice on the largest platform in that part of market. And this partnership that we've signed with them, we're already seeing benefits from being able to plan marketing and promotional activity more effectively. So I'm really pleased with how that's going, see room for further growth, and it's certainly been a strong part of what's been helping us get to such strong growth rates in e-com as an overall business. And as Leah said, it's one of the differentiated offers that we've got in that space.

Your next question comes from Shaun Cousins with UBS.

You've expanded your strategy to include everyday essentials. And I assume that appears to accommodate the interest that Coles announced about Greencross. Can you provide some indications of the capability that Coles has in every day Essentials in a stand-alone format, big and small rather than a supermarket format as investors reacted negatively to Coles interest in Greencross suggesting a lack of confidence that capability, and there appear to be a preference to capital management. So can you maybe provide, hopefully, there's an opportunity for you to talk about the capabilities that in Everyday Essentials as a stand-alone, please?

Well, why don't I start maybe talking a little bit about the thinking behind Greencross, and then I might Anna to talk a little bit about the focus that we've got in every day essentially, which really for us is the nonfood component of our grocery offer. So Shaun, I think it shouldn't come as any surprise to anyone that we regularly assess opportunities, which we think are going to complement or strengthen the business and ultimately create value for shareholders. And in general, we would be interested in looking at adjacencies that are quite close to the core areas of the business that we already run. And so something like specialty retail is a good specialty pet retail, I should say, is a good example of this because we already have a substantial pet business that we run with supermarkets. And I think if you go to the Greencross opportunity, I mean, we were attracted to it as a segment because 70% of households have at least 1 pet. And so it does make it a real stable component of a weekly budget, and you're also seeing the impacts of pet humanization and a focus on pet nutrition, which is really encouraging customers to shop at pet specialty, where they can get access to a different range and they can get access to advice. And I think what many people don't appreciate about pet specialty is there's not a lot of overlap between pet specialty and grocery at -- about 90% of the range that you will find in a pet specialty retailer is not available in Coles. And because of the supplier dynamics, that's unlikely to change. And so you've seen us do the Swaggle investments that we made. That certainly taught us a lot about how to play in that specialty phase. It's an area we will continue to look at and assess opportunities going forward from an inorganic perspective. But I think given we ultimately weren't able to reach a point of value -- a point of agreement on value around Greencross, we're now firmly focused on what we can do in the short to medium term around organic opportunities. And maybe I'll get Anna just to talk to that.

Yes. Shaun, nonfood, as you know, remains a really strategic priority for us, and we have made some really clear progress on establishing strength in that area last year. That's really following on from the reset of the portfolio around value, better range relevance and much stronger execution. Importantly and pleasingly, we've seen a real change in the trajectory of both categories. After more than 2 years of what I'd say is really consistent year-on-year pressure on share, we have returned to positive share momentum throughout half which gives us increasing confidence that the changes we're making are working. And there are a couple of things that have really been driving that Health & Beauty continues to strengthen, and we've seen really good share growth across many of the core categories, be that had dental vitamin safe and body wash. And that's been really deliberate around stepping up innovation in those areas and bringing in a much more differentiated range of both exclusive and different brands. And some of those in hair care might be mini or dose there and many others that we're working through. But also alongside that, we've strengthened our everyday value proposition, making it much simpler for customers to find dependable value. And actually, as we exited Q4 everyday value is the highest contribution we've seen of those categories. The other area I would just say is driving the performance is the strong results from our own brand and the new bulk offer. So Coles Ultra, as Leah touched on earlier, delivered double-digit sales growth in the year and supported by very strong volume growth. And that was really about sharper innovation in the core categories at [indiscernible]. And then again, I think kind of a core category, but toilet paper a really good example where we've invested in value, bulk and price investment of both quality into own brand business, and that really is driving both improved offering share. But we're not stopping there on own brand. We're building on that momentum taking it into new categories and key areas that matter make for customers. An example of this has been the strengthening of the [ Cob ] brand in baby and we've gone into input food the last couple of months. We've been really encouraged by customer response in that space. So I'd say overall, we're really pleased with the momentum. We're pleased with the positive share growth, but there is a lot to do. It is a very competitive market, and we've got a clear plan, and we've just got to execute against it.

Great. And my second question is just around big-box liquor sales. I think in the third quarter, you called out that they were down some 20% in the -- that they were down 20%. Can you just maybe quantify what they were down in the fourth quarter as trading still remains sort of difficult there? And more generally, would you consider an exit a big box, possibly maybe at the end of lease, as 1 clear that ongoing investment in that business is sound and it seems as though convenience is the winning sort of channel certainly for your business there. So maybe some more detail on big box trading and sort of outlook, please.

Yes. So we did see the big boxes improved in Q4 relative to where we were in Q3. But overall, for the total year, they still were in decline somewhere between sort of negative 60 and negative $20 million -- we've done a full review now of the entire portfolio, not just the warehouses, but the entire liquor portfolio. And what I'd say is whilst the warehouses have underperformed -- the performance is not uniform across all of the stores in the cohort. And so what we've done in the review of this look, our store-by-store base is very much at micro location, which makes a big difference here to performance. And what you're seeing in the strategic update that we've given today is on the back of that is the 30 store closures, which we're anticipating on doing in FY '27. And I would say there is a disappointing amount of warehouses that are in that group. However, for the warehouses that haven't got the closures coming, we have optimism around getting them into a growth position again, and you Actually, if you visited any of our stores even in the last couple of weeks, you will start to seeing that there are some things that we are doing to really differentiate the range in [ Lakala ] warehouse from the rest of the network, and we're very encouraged by the early performance of that.

Your next question comes from Phil Kimber with E&P Capital.

Maybe the follow-on on liquor. I was just interested if I look at the half the GP margins have gone up quite a lot in the second half for liquor, they're up 40 basis for the full year and 20-odd basis points in the first half. So it's sort of implying 60 basis points in the second half. At the same time, sales are still negative, arguably deteriorating a little bit. Is it just trying to understand the the correlation there that in a market that we understand is incredibly competitive why your GP margins would be going up at the same time as the sales are going down?

Yes. Thanks for the question, Phil. I might ask Claire to answer this one for us.

Yes, thanks for the question. Look, our gross margin pleasingly increased by 40 as for a few reasons. Our strategic sourcing program has been really strong and improved in the second half. promotional optimization activities and also growth in our Coles 360 media income has improved half-on-half and a really disciplined approach to price investment throughout the year. So they are the key reasons why gross margin has improved, acknowledging that sales are still challenged in some areas.

I mean, what about your value sort of comparisons to the market? Have they weakened off it I know there's sort of 2 quite different trends going on in this business. between the convenience side and the Leah warehouse side, but just interested there as to whether you need to do a bit more work to further sharpen pricing?

It's a good question. I think we're comfortable with where our price indices are at the moment. As you can see, strategically, we're definitely moving to a stronger focus on the co-located store with supermarkets. And by and large, that's our Liquorland sellers format, and they remain very competitive in terms of their competition that they have in the market. And as I said, with regards to warehouse, what we are looking to do is to really start to differentiate the range there, so that we've got an incremental offering for our customers there?

Is that what you mean when you say grocery in the liquor stores?

It's a combination of things. There are definitely some grocery items that have gone into the warehouses and they make a great incremental purchase when you're buying alcohol, things like mixers, soft drinks, chips, even things like Berocca, Phil, which you obviously need the next day. But we are also looking at differentiating range within the alcohol offer as well at both ends, looking at what we can do from a value perspective but also bulk sizes and the more premium end as well.

Your next question comes from Adrian Lemme with Citi.

My first question was just on the trading update in supermarkets. It's better than more fearing based on the supply feedback. Can I just ask, have you had to sacrifice some margin to sustain sales during this recent period, please?

Yes. So I think we're quite pleased with where it ended up, given if you look at the 2-year stack in particular, I mean, it's an unusual shape, but if you take consistent with Q4 and you stack it on where we were last year, which was 4.9% or actually probably the more relevant number is the 7% ex tobacco. That's a very strong 2 year-on-year growth number even with that moderation that we saw from the collectible campaigns for 3 to 4 weeks in the middle. And as I said in the outlook, we're very pleased that the sales have recovered quickly both the collectible campaign coming to an end. I think more generally, not even just talking about the first 8 weeks. But I would say the competitive intercity right now is quite strong. That's not new, but we certainly are seeing many of our grocery competitors investing into rice, and we are responding to that to that to ensure that we remain competitive. And then we are also proactively investing in areas, particularly on brand to ensure that we're giving the customers a basket that really is very value-oriented.

And could I just ask on the balance sheet positioning? Just pulling together a couple of things I think we said on the call, I think you mentioned that you would look to return surplus capital to shareholders. And in the earlier question, it was said that you're more focused now on organic opportunities in nonfood. So just pulling all of that together, the gearing is down to 2.3x, it was, we think, sort of over 3 to 6 years ago. So can I just ask, do you think you actually do have surplus capital at the moment. I guess that would depend on your acquisition outlook. But do you look to return that capital to shareholders over the next 12 months? Or I just wanted to get your thinking on that, please.

Adrian, great question. Thank you for that. Look, I think it all starts, Adrian, our capital allocation framework that Leah took us through a little earlier. And really, we do take a very disciplined approach to how we allocate capital. And we take into account the things that you've highlighted, things at the strength of the balance sheet. What our organic investment requirements might be dividends, strategic flexibility. And of course, the relative return from all those various areas that you could deploy capital, which becomes really important. So we have been -- and as you know, we've been paying out dividends of around 80% of our earnings in the form of dividends each year. That's been really consistent since demerger. Next year, we actually stood up and where the fully franked dividend is $1 billion, which is quite achievement. But in terms of surplus capital beyond our requirements, the Board is always going to consider the most appropriate way to deploy or return capital. And the objective is and will always be how do we generate the optimal returns for shareholders over the long term.

Your next question comes from Bryan Raymond with JPMorgan.

Just one on the renewal program. I just wanted to ask about the average store age at the moment. How -- I guess, since it was either opened or last had a major renewal as opposed to a light touch renewal, where that is versus your target and whether these 150 renewals are like incremental to sort of what you have been doing, which is 50 to 70 per annum in recent years? So just keen to understand sort of the magnitude of what you're doing here on renewing store network.

Yes. Thanks, Bryan. Great question. Well, I think we've pretty body. I think mine were renewing at a range of 50, I would say that our store fleet was getting older, right? And when we stepped it up in FY '26 to 70, that's the point at which is your fleet on general actually gets younger. And certainly, going forward with the 150 renewals that we are indicating that we could see that our average fleet will get done going forward. But it's a great reminder though of what are we spending the renewal amount in. And I think we talked a little bit about and I talked a little bit about that it is going to look at how do we actually build capacity for growth. And that's the important distinction. So these aren't just normal renewals, and we will get a younger fleet out of it, but will more importantly, increase the capacity to facilitate more online, right, but also better experiences for our customers in store. And that's our focus with these 150 renewals over the next 3 years.

Right. Just to put that in context for us through numbers, is it possible to give us sort of an average spend per renewal in this 150 versus what you've been doing in recent years, which I assume is not as transformative for those particular stores?

Look, we are going to go into -- I won't go to in terms of breaking it down. But I think the best way to think about it is if I look at the sort of $300 million or the $150 million over the next FY '27 and FY '28. 70% to 75% of that spend, and it is really in relation to property, whether it's the new stores or the renewals. It's all about how do we actually grow and augment our store network for growth.

Right. Okay. That's helpful. And then just on the new store openings, as you said, it's been a bit softer in recent years and you are looking to accelerate that, which is good to see -- the 45 stores, I assume a lot of those have been in train for some time because these things don't happen overnight with the property planning approach, et cetera. Just wanting to understand like how confident you are in delivering those let's call it, 22 to 23 stores per annum for the next couple of years, given you've been doing roughly half that pace in terms of store openings over the past 3 years? Or is there some chance of slippage given delays and all sorts of things we're building and approvals, et cetera.

Yes. So in relation to the 45, Bryan, we're very confident. We wouldn't have called it out at all. So let me say, I think we're very confident we'll always see things like weather and things that could impact timing. What we are confident on firstly is these stores are, firstly, have been pre the merger law forms that active see, so they are approved. We have line of sight. We're doing more through our Coles Property Group as well, and we are in constant dialogue and constant monitoring with our developers that are working through to the extent that lease develop stores. So Bryan, we're very confident of the 45 stores but yes, always -- yes, there'll be things about weather and things that I can't always predict that we're confident that the delivering the over 2% net space growth over the next 2 years.

I think it's probably also just worth touching on in the context of this question around the ACCC merger regime. So we have been submitting proposals through that regime since it came into place in January. There's obviously been a lot of media coverage around Kalgoorlie, which is the one store that has been denied through that process so far. But we've actually received 10 approvals through the process as well. So we are proactively and actively participating in that process and successfully having stores approved.

Your next question comes from Tom Kierath with Barrenjoey.

My question is just on your tobacco growth rate. I suppose, especially in July and August because you're lapping some pretty tough numbers, obviously, when the legislation changed. But can you maybe just give us an update on what's happening in the trading update on tobacco. It's not quite volatile and you haven't given us a sales ex tobacco growth rate there?

Yes. So sales have remained relatively consistent now in terms of the dollar number for several months, and that's really because we've cycled over that Q4 exit that we made of products last year related to the regulatory change. And so you will have seen in the Q4 numbers, there's very little difference between the all the store number and the ex tobacco number. That's what you should really expect going there now.

Yes, okay. And then just secondly, on the gross margins, I think they only went up 7 basis points in the second half. A bit more just with tobacco kind of coming down, especially in that third quarter. Is the right way to read it like more price investment or just some of the, I guess, higher costs coming through like fuel prices, et cetera, that you couldn't kind of offset necessarily there?