Coles H1 profit in Australia beats forecasts, but cost constraints are looming.

Coles Group Ltd., Australia's No. 2 grocery chain, reported first-half profit that exceeded analysts' expectations as decreased pandemic-related spending offset inflation. However, it cautioned that rising wages and energy costs would continue to drive up costs and drive down share prices.

Coles supermarket in Australia.

Feb 21 (Reuters) - Australia's No. 2 grocer Coles Group Ltd (COL.AX) said first-half profit beat analysts' forecasts as reduced pandemic-related spending offset inflation, but it warned rising wages and energy bills continue to push up costs, sending its shares lower.

After barnstorming sales during COVID-19 lockdowns, Coles and larger rival Woolworths Group Ltd (WOW.AX) have borne the brunt of a changing economy as Russia's invasion of Ukraine drives up power bills and a shortage of workers elevates wages.

Extreme weather events that have wiped out crops and flooded freight roads and railways, limiting stock availability, have also made things worse for the two supermarket chains, which together ring up two-thirds of the country's groceries.

On Tuesday, Coles said profit from continuing operations jumped 11.4% to A$616 million ($424.61 million) in the six months to end-December, just ahead of analyst forecasts.

But that was helped by a reduction in COVID-19 expenses since the same period a year earlier, the company said. Sales from continuing operations rose 3.9%, half the rate of inflation in the period, a sign that people were curbing spending, according to analysts.

A reprieve from extreme weather events that pushed up fresh produce prices in the first half would likely help moderate inflation in the current half, but rising wage and energy bills were continuing to drive up supplier costs, the company said.

"It's a very complex set of movements and it's somewhat difficult to predict where it goes," said Leah Weckert, a Coles executive who the company said would be its new CEO from May.

"We are expecting cost pressures to remain but we are expecting to see some moderation," Weckert added on an analyst call.

The company said growth in shopping volume had returned to "modestly positive" in January, without giving specific financial forecasts.

Coles shares were 1.5% lower in afternoon trading, against a 0.2% dip in the broader market (.AXJO), as analysts balked at multiple cost headwinds.

"The cost growth was probably a bit faster than what people had forecast," said Barrenjoey analyst Tom Kierath.

"Freight costs, labour in stores: it's still hard to get people at the moment so I think you're probably seeing the impacts of that coming through."

Coles lifted its interim dividend 9% to 36.0 Australian cents per share from a year earlier.


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