By Sameer Manekar and Byron Kaye
(Reuters) -Australian No.2 grocer Coles said on Tuesday recent interest rate cuts had set off “green shoots” of optimism among shoppers and driven up sales, sending the company’s shares on their biggest rally in five years.
The outlook eclipsed an annual profit that beat analyst forecasts and signals a shift in sentiment toward Australia’s supermarket duopoly of Coles and Woolworths, which faced a public backlash during a living cost crisis.
After raising rates since 2022 to slow inflation, the Reserve Bank of Australia began cutting them this February, and Coles said the change had prompted shoppers to spend more on in-home entertainment.
That led to an uptick in supermarket sales, which started in the June quarter and has continued through the first eight weeks of the new financial year, the company added.
In a year when supermarket sales rose 4.3% overall, growth surged to 4.8% in the June quarter and has nudged even higher to 4.9% since then.
“We’re definitely seeing some green shoots in terms of customer sentiment,” CEO Leah Weckert told analysts on a call.
“That really has come from the interest rate cut and people starting to feel a bit more optimistic about household budgets.”
Shares of Coles rose 8.6% by mid-session, against a slightly weaker overall market, in their biggest one-day advance since March 2020, as investors looked past declines in alcohol and tobacco sales towards improvement in its main earner, groceries.
The result “feels more optimistic in tone of release, with a strong start to FY26 and signs of improving sales all supportive of operating leverage beginning to flow through the P&L (profit and loss),” Jarden analysts wrote in a client note.
Farhan Badami, an analyst at eToro, said the result showcased Coles’s defensive appeal while suggesting it was positioned for stronger growth.
“If easing continues as expected, consumer wallets could loosen, offering Coles the opportunity to translate its resilient sales growth into stronger earnings momentum,” he said.
Underlying profit fell 2.4% to A$1.18 billion ($767 million) for the full financial year, ahead of a Visible Alpha consensus estimate of A$1.11 billion, as rising finance costs offset an increase in sales.
The grocer also reported a 30% decline in tobacco sales in the year as laws aimed at curbing smoking by raising prices have triggered illegal tobacco consumption, Coles said.
Coles declared a final dividend of 32 Australian cents a share – the same as last year – bringing the full-year payout to 64 cents, in line with market expectations.