Coles' new chief executive has warned investors that the supermarket has a long and difficult road ahead before it can return to sustainable growth, as it comes up against increasing costs and slowing sales momentum.
Flagging a major "strategic reset" that will bring on new investment costs, Steven Cain also revealed a volte-face on the company's attitude towards gambling assets by leaving the door open to continued ownership of its 3000-strong fleet of poker machines.
Mr Cain, who took on the top job in September, on Tuesday handed down Coles' first earnings result since it was demerged from Wesfarmers in November, and laid out some of the challenges ahead for the now independent business.
He said Coles' costs were rising faster than sales due to higher wages, energy bills and logistics expenses; it was losing market share in NSW; it needed an IT systems and logistics upgrade; and customer preferences were changing at lightening speed with a particular emphasis on convenience.
Mr Cain said a "reset" was needed that would encompass an improved fresh food offering, an easier customer experience, investment in warehouse automation and IT, and an efficiency drive that would cut costs.
"We need to look closer at our cost base, so that we can afford to invest in the future," Mr Cain said.
"We’re going to have to invest a significant amount of money over the next five years to take advantage of the opportunities ahead of us."
Wesfarmers spun-out Coles because its earnings were not growing fast enough. Coles' earnings grew 125 per cent between 2009 and 2016, but earnings have fallen 19 per cent since then.
Coles revealed on Tuesday that sales growth had plunged to 1.3 per cent in the three months to December, from 5.1 per cent in the first quarter when it was boosted by its wildly successful Little Shop toy promotion and giving away plastics bags after Woolworths had banned them.
Credit Suisse analyst Grant Saligari said that typical of a new CEO, Mr Cain had used the result to put out a lot of bad news and set realistic expectations.
“Notwithstanding that, there are some challenges in the business - it’s clearly got some investment required in its stores.. and is behind Woolworths in terms of its supply chain (automation)," he said.
Under Wesfarmers ownership, management had repeatedly said it was ethically uncomfortable about Coles' 3000-odd poker machines held through its pubs business and had committed to divesting from them.
But Mr Cain signalled a change in attitude, declining to repeat the same concerns and talking down the prospect of a sale in the short term. If it did offload its pubs, it would likely be in a joint-venture structure.
Coles reported net half-year profit after tax of $381 million for the six months to December 31, down 29 per cent from the same period a year earlier.
Underlying earnings before interest and tax of $733 million was slightly short of market expectations of $744 million. Coles said it would not pay a dividend, with its earnings up to November 27 being reflected in Wesfarmers' first-half dividend.
Shares closed 4.1 per cent lower to $12.08.