Australia’s second largest retailer Coles has delivered weaker than anticipated first quarter results, with sales growth failing to keep pace with inflation.

Coles sales rose by 3.2% during the quarter to A$8.5bn (US$6.5bn), trailing inflation which has increased by 3.9%. Excluding Coles Express, which was hit by high petrol prices, sales increased by 5.1% for the 13 weeks ended 29 October. Sales from non-food businesses rose 2.2%, while comparative sales at its food and liquor outlets rose 3.3% and overall food sales increased 6.3%.

The company reaffirmed its forecast for flat annual earnings this fiscal year as it focuses on its strategic plan to increase sales and earnings by cutting costs and rebranding its stores.

John Fletcher, CEO, said he expected the upward trend in food and liquor sales to continue as strategic initiatives, such as increased service levels in its supermarkets and the conversion of Bi-Lo stores to the Coles brand, boost sales.

“Comparative store sales in Food and Liquor have increased in line with our expectations. This trend is expected to continue as strategic initiatives gain traction, including increased investment in supermarket service levels from this month and the continuing Bi-Lo conversion programme,” Fletcher commented.

Fletcher said Coles was gaining market share and the 45 Bi-Lo stores which had been rebranded were showing 7-8% improvement in sales on average.

Shares in Coles Myer, which last month rejected a takeover bid of A$18.2bn from a private equity consortium, dropped by 1.02% following the sales release to A$13.59.