Purchase of Coles (ASX: COL)

3rd November 2023

Across the Australian Equity component of investor portfolios we have bought Coles (ASX: COL).

Coles is the second largest supermarket chain in Australia with c.28% of the food grocery retailing market. It also has a liquor business that owns the Liquorland, Vintage Cellars and First Choice Liquor brands.

We are attracted to Coles for the following reasons:

It has a strong market position in a concentrated, stable industry which gives it pricing power and hence an ability to better manage gross margins in this inflationary environment.
Longer term growth is supported by population expansion including ongoing immigration.
Supermarkets should prove resilient as households face increasing cost of living pressures given the essential nature of the products sold.
It delivers strong operating cash flow and operationally the company is performing well with positive earnings momentum.

Coles has three key levers for value creation that we would like to highlight:

The business continues to invest in new stores and store refurbishments across supermarkets and liquor. Growth in store footprint and modernised stores with improved eCommerce capabilities will help drive organic revenue growth.
In recent years management has invested significantly in productivity initiatives, their supply chain capabilities, and customer experience through an enhanced eCommerce experience. This has reduced short-term earnings. As these investments complete and start to deliver, we expect to see improved margins and earnings growth.
The business recently experienced a significant increase in total loss of inventory due to theft. They have since invested in increased store security and smart gates at high-risk stores, we expect this to reduce total loss and earnings to normalize.

We think Coles is suited to the portfolio because resilient earnings and high dividend yield.

We have funded the purchase of Coles with cash that remained from the sale of Origin Energy and reduction in the weighting in the portfolio to Ramsay. This was done due to the tougher operational conditions Ramsay continues to face post COVID and the impact of higher interest rates leading to a reduction in dividends.

As always, thank you for your ongoing support, it is very much appreciated. If you have any questions or would like more information, please contact your adviser.

Warnings and disclosures

This material has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this material is General Advice and does not take into account any person’s individual investment objectives, financial situation or needs. Before making an investment decision based on this advice you should consider whether it is appropriate to your particular circumstances, alternatively seek professional advice. Where the General Advice relates to the acquisition or possible acquisition of a financial product, you should obtain a Product Disclosure Statement (“PDS”) relating to the product and consider the PDS before making any decision about whether to acquire the product. You will find further details of the service we provide and any cost to you within the Financial Services Guide. Any references to past investment performance are not an indication of future investment returns. Prepared by EP Financial Service Pty Ltd ABN 52 130 772 495 AFSL 325 252 (“Elston”). Although every effort has been made to verify the accuracy of the information contained in this material, Elston, its officers, representatives, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this material or any loss or damage suffered by any person directly or indirectly through relying on this information.