Those greedy investors didn’t like the news that supermarkets giant Coles is going to boost spending on new facilities – not so much stores – by more than $2.5 billion over the next two years.
Many investors, especially among institutions talk how companies have to invest for the future, but when it comes to doing that – with all the expense, higher capital needs, depreciation and other costs (and their impact on earnings) – the support fades away and they become critical and sell.
So it was yesterday after Coles revealed its big plans at an investor day and the shares lost more than 4% to end the day at $16.29, a one month low.
What investors didn’t like was the size of the depreciation and amortisation bill in 2021-22 and its capital expenditure to increase to $1.4 billion in 2022 from just over $800 million in 2019-20 and around $1.1 billion in the year to June.
As a result, Coles said it expects to book between $1.67 billion and $1.72 billion in depreciation and amortisation in the 2021-22 financial year. That will be up from $1.5 billion (including lease costs).
Much of the $2.5 billion will be spent on improving its online shopping capabilities, data systems and new self-serve checkouts as the business seeks to regain a 1.3% market share loss over the COVID-19 pandemic.
At an investor day on Thursday, Coles unveiled its plan to grow its business over the coming years through a range of new investments, with CEO Steve Cain saying the company is set to spend an additional $1.4 billion next financial year on top of the $1.1 billion spent in the current financial year.
Coles’ investments will be largely weighted towards technology, with data, online and automation all set to get a boost.
The company is working with global technology companies Witron and Ocado to build automated warehouses and fulfilment centres, benefits of which Coles expects to start flowing through to sales and profits by the 2024 and 2025 financial years.
Depreciation and amortisation charges for these new systems will start impacting Coles accounts in the 2021-22 financial year, hence the rise in the provisioning.
Mr Cain said the chain will double its investment in online systems by investing in better ordering systems, analytics and more technology within its stores, with the business finding that customers who shop both online and in-store spend twice as more with the retailer.
Coles will spend heavily on transforming its front-of-store systems in supermarkets, which Mr Cain said would include rolling out larger self-serve checkouts aimed at accommodating shopping trolleys, along with plans for systems which would allow customers to checkout using their mobile phones.
Coles will also step up the existing roll-out of its new format Liquorland stores as part of a broader strategy to simplify and grow its liquor division.
Interestingly Mr Cain admitted some of the company’s spending flurry is due to it being previously under-invested in online while the business was owned by Wesfarmers (Coles was demerged in late 2018).
“When the demerger happened, Coles was not advanced as a technology company, but with three more years to go, I think Coles will have transformed into one of the best global technology retailers,” he said.
“There’s a myriad opportunities facing us. The market in Australia is very good for food and liquor. It’s growing, there’s plenty of opportunities, and we think we’ve got the assets to exploit some of them,” he said.
