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Goldman Sachs gives its verdict on the Coles share price

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The Coles Group Ltd (ASX: COL) share price has been dragged lower with the market on Friday.

In early afternoon trade, the supermarket giant’s shares are down almost 2.5% to $16.22.

Why is the Coles share price falling?

Investors have been selling down the Coles share price on Friday amid broad market weakness.

This has been driven by a selloff on Wall Street over the last couple of trading sessions following the US Federal Reserve’s latest interest rate hike.

This hike and the central bank’s plan to continue raising rates in the coming months have sparked fears of an unavoidable recession and sent many investors to the exits.

Anything else?

Also potentially weighing on the Coles share price today has been a broker note out of Goldman Sachs this morning in response to the company’s divestment of Coles Express.

According to the note, the broker has retained its sell rating and $15.60 price target on the company’s shares. This implies potential downside of approximately 4% from current levels.

Goldman continues to believe that Coles will be left behind by rival Woolworths Group Ltd (ASX: WOW) due to its slower digital transformation. It also notes that the Coles Express sale is immaterial to its forecasts given its minor impact on earnings and its valuation.

The broker explained:

We view the potential divestment as ROC positive for COL given the FY22 EBIT contribution of 4mn (post lease interest) implies a low single digit ROC as opposed to GSe for COL at 24.3% in FY23E. Supply of goods has been noted as offering a positive contribution to business profits, but immaterial in scale to the group on the conference call. Overall, Coles Express accounts for c. 1.1% of our SOTP valuation on Coles.

Our Sell rating on COL is based on our view that COL remains a laggard in digital transformation which could result in market share losses and the ongoing high investment cycle as they catch up will put further pressure on group margins and ROC. We do not view this transaction as material to impact our view on the core supermarkets business given the relative size of the segment compared to the group’s business.

Read More: Goldman Sachs gives its verdict on the Coles share price

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