Australia No. 2 grocer Coles grows FY profit, warns of cost pressures

© Reuters. FILE PHOTO: A woman walks in the fruit and vegetables section at a Coles supermarket in Sydney, Australia, February 20, 2018. Picture taken February 20, 2018. REUTERS/Daniel Munoz/

By Harish Sridharan and Byron Kaye

(Reuters) -Australian No. 2 supermarket chain Coles Group (OTC:CLEGF) posted a jump in annual profit on Wednesday, bettering analyst forecasts, as it reined in spending amid surging inflation, but warned cost pressure was set to continue, sending its shares down sharply.

Retailers globally have warned that rising fuel and ingredient costs will translate into higher price tags as they seek to protect margins, even as shoppers switch to lower-priced goods amid a cost-of-living squeeze.

In Australia, where Coles and larger rival Woolworths Group Ltd collectively sell about two-thirds of groceries, food retailers are facing an additional challenge of flooding which has wiped out crops and blocked roads, sending up wholesale costs.

Net profit for Coles rose 4.3% to A$1.05 billion ($724 million) in the year to end-June, compared with the median analyst forecast of A$988 million, according to Refinitiv Eikon. But the company gave no earnings guidance, saying that while it expected inflation to ease it remained.

"There is a fair bit that's passed through in terms of the farmland product and there's a bit to come," CEO Steven Cain told journalists on a call, referring to shelf price inflation.

"It's by no means behind us but we expect a better picture in the second half."

Shelf price inflation hit 4.3% in the June quarter, still behind Australia's overall inflation rate, but nearly three times Coles's inflation of 1.7% over the whole year, an indication of the rapid change to trading conditions.

Since interest rates began rising in May, Coles had detected a shift in shopper preferences from branded to private-label pasta, from fresh to canned vegetables and from beef to cheaper meats like pork, lamb and chicken, Cain said on the call.

Coles shares fell as much as 5.2%, against a 0.6% gain on the broader market, before rebounding in mid-session as analysts weighed up the impact of ongoing cost pressures in the absence of profit guidance.

"Given sensitivities around food inflation, management was always going to be guarded on the outlook," Jefferies analysts said in a research note.

Coles declared a final dividend of A$0.30 per share, taking total dividends to A$0.63, up 3.3% on the previous year.

($1 = 1.4499 Australian dollars)