A higher wages bill, a struggling petrol station business and lost sales momentum could see supermarket giant Coles’ earnings fall $100 million in its first year as a standalone company, according to Bank of America Merrill Lynch.

In research released on Tuesday, a day before Coles is launched onto the ASX as a new company, BAML analyst David Errington said Coles’ sales momentum appeared to have fallen in the past four weeks following its successful “Little Shop” toy giveaway.

That promotion drove Coles’ strongest quarterly sales figures in two years (up 5.1 per cent), but the supermarket has said it has since returned to pre-Little Shop growth rates of around 1.8 per cent.

“This is a concern going into the critical Christmas trading period,” Mr Errington wrote in a note to clients.

“It had attracted customers into its stores (to receive… toys), but it appears to have lost the customers as soon as the program ended.”

BAML has one of the market’s most bearish outlooks on Coles. Other market watchers expect Coles to perform better, with Citi forecasting that its earnings before interest and tax will grow by $74 million to $1.48 billion in 2019.

Mr Errington said Coles faced the headwind of $70 million in higher labour costs after signing a wage deal that restored workers’ weekend penalty rates in April, with any attempt to offset this by rostering fewer workers on putting sales growth at risk.

Meanwhile BAML predicted a $50 million fall in earnings from Coles struggling petrol station division, which has been suffering from poor relations with its fuel supplier Viva Energy resulting in uncompetitive prices.

Woolworths’ sale of its 540 petrol stations to British giant Euro Garage announced last week raised the risk of greater competition on fuel prices, which could further hurt Coles’ earning, Mr Errington  said.

Coles will launch onto the ASX as a standalone business on Wednesday in an estimated $18 billion demerger from its parent company Wesfarmers.

Wesfarmers announced the spin-off earlier this year, saying the company could grow earnings faster if it focused on its other businesses – which include Bunnings, Kmart, Target, Officeworks and an industrials division – while creating in Coles a defensive and dividend-yielding stock for investors.

Wesfarmers investors, who will receive one new Coles share for every existing Wesfarmers share they own, last week voted overwhelmingly to approve the demerger.

The Coles’ share price will be set on the day depending on how the market trades the new stock, with analysts’ predictions ranging from $11.90 to $14.20.

Extracted from Brisbane Times