Coles share price sinks 12%: Should I buy the dip?

The Coles Group Ltd (ASX: COL) share price is having a terrible finish to the week.

Shares in the supermarket giant have sunk 12% to $20.66 on Friday following the release of the company's first-quarter trading update.

While there were some encouraging numbers in the release, investors appear concerned about the company's outlook.

But could this sharp sell-off be a buying opportunity?

What did Coles report?

According to the announcement, Coles reported group sales revenue of $11.2 billion for the first quarter of FY27, representing growth of 2.2%.

Its supermarket business performed better, with sales increasing 3.6% to $10.3 billion. Comparable sales growth came in at 2.7%.

There were also some encouraging developments beneath those numbers. Online supermarket sales jumped 22.9%, with eCommerce penetration reaching 15.7%. Meanwhile, Exclusive to Coles sales grew 4.3%, supported by a 13.3% increase in Coles Finest sales.

I think these are positive signs that the company's investments in online shopping and its own-brand ranges are delivering results.

However, there were some disappointments. Liquor sales declined 1.3%, continuing the weakness in that business.

More importantly, Coles appears to be losing sales momentum relative to its major rival.

Earlier this week, Woolworths Group Ltd (ASX: WOW) announced its first-quarter update and reported Australian Food sales growth of 6.9%, with comparable sales increasing 6.1%.

Admittedly, Woolworths benefited from its popular Ooshies promotion, which boosted sales during the quarter.

Nevertheless, the difference is significant and suggests Woolworths is currently doing a better job of attracting customers. This is something Coles will need to address.

Why has the Coles share price crashed?

I suspect the biggest concern for investors is the company's outlook.

Coles revealed that supermarket sales growth had moderated during the first four weeks of the second quarter as competition increased.

Management also warned that higher fuel prices would increase operating costs during the first half.

Combined with additional investment in customer value, this has led Coles to forecast broadly flat first-half supermarket earnings before interest and tax (EBIT).

That's disappointing after the company delivered strong earnings growth in FY26. It also raises questions about how quickly Coles can improve profitability while competing with a resurgent Woolworths.

The company advised that it is responding by investing in lower prices and relaunching its Every Day Price program, but these initiatives may take time to deliver stronger sales momentum.

Is this a buying opportunity?

Despite these challenges, I think the sharp decline in the Coles share price could be an opportunity for long-term investors.

One reason is its valuation. According to the latest CommSec consensus forecasts, Coles shares now trade on a forward price-to-earnings (PE) ratio of approximately 21 times FY27 earnings.

That falls to around 19.7 times for FY28 and 18 times for FY29. It also compares favourably to Woolworths' FY27 forward PE ratio of approximately 27 times.

I think that is attractive for a business with defensive qualities and a positive long-term growth outlook.

However, it is important to note that those forecasts were made before today's trading update. As a result, analysts could revise their earnings estimates lower in the coming days to reflect today's news.

Nevertheless, even if Coles delivered flat earnings per share (EPS) in FY27, it would only be trading on a PE ratio of 22 times based on FY26's EPS of 93.8 cents.

Furthermore, I would focus less on the now and more on the long-term. The supermarket giant has invested heavily in its automated distribution centres, online fulfilment capabilities, and store network.

I believe these investments should help improve efficiency and support profitability over time. And while Woolworths is currently enjoying stronger sales growth, competition between the two has always fluctuated.

Coles remains one of Australia's leading supermarket operators, with a large customer base and relatively defensive earnings.

Foolish takeaway

I think today's sell-off creates an opportunity to buy Coles shares at a more reasonable valuation.

The company clearly has some work ahead of it, particularly when it comes to improving sales momentum and protecting margins.

However, I remain confident in its long-term prospects and believe its operational investments can deliver further benefits.

There could be more volatility if analysts downgrade their forecasts, but at around $20.66, I think buyers are getting a good deal.

The post Coles share price sinks 12%: Should I buy the dip? appeared first on The Motley Fool Australia.

Motley Fool contributor Grace Alvino has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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