The supermarket giant expects to benefit from the easing of restrictions as Australia's economy reopens and shoppers return to stores in the current quarter. However, the company warned the trading environment remains volatile.
Group CEO Steven Cain said supermarket sales lifted in early January as the Omicron variant spread, before moderating later in the month, even as the company incurred COVID-19 related costs of $30 million in that month alone.
The recent floods in South Australia, which knocked out a major railway line for four weeks, have also impacted sales, particularly in Western Australia.
"The disruption is significant, it's ongoing, but we're hoping that by Easter we'll be able to put on a good show over there," he said on a post-earnings call on Tuesday.
Coles and larger rival Woolworths profited from customers stocking up food and groceries amid widespread lockdowns in the eastern states during the second half of 2021.
But in more recent weeks, the retailers have endured scores of frontline and delivery staff having to isolate, limiting their ability to restock shelves and driving up costs.
Woolworths, which will report first half results on Wednesday, has already forecast earnings to fall between 7 and 8 per cent due to higher costs and a shift to normal patterns of trading.
By comparison, Coles on Tuesday reported a two per cent drop in first-half profit to $549 million.
Sales for the 27-week period to January 2 rose one per cent to $20.8 billion following a strong Christmas trading period in the supermarkets and liquor segments.
Shares in the retailer jumped to their highest level since early-January on the steady performance. By 1500 AEDT, Coles shares were up 3.3 per cent to $17.29 in a weak Australian market.
Sales in its biggest segment, supermarkets, rose 1.1 per cent to $18 billion, while liquor sales were 2.7 per cent higher at $2 billion. Online spending surged 46 per cent to $1.5 billion.
However, sales at the convenience store format Coles Express slid 8.5 per cent to $578 million following mobility restrictions due to the Delta lockdowns in the eastern states.
Earnings before interest and tax were hit by $150 million of COVID-related costs during the half-year, an increase of $45 million from a year ago.
Coles also incurred $20 million in relation to the Witron and Ocado transformation projects that will boost its distribution and digital capabilities.
Net costs increased by a further $13 million as a result of lower earnings from property operations, higher insurance costs and an increased net loss from Coles' 50 per cent share of Flybuys.
Still, analysts at investment bank Jefferies called it a "solid, clean result" with better than expected margins in the key Supermarket & Liquor businesses.
"Cost control was much better than Woolworths with COVID costs moderating slightly in 2Q from 1Q levels," they said in a client note.
The company kept its fully-franked interim dividend at 33 cents per share, in line with a year earlier.
COLES HY PROFIT DROPS
* Profit down two per cent to $549 million.
* Sales rose one per cent to $20.79 billion
* Fully-franked interim dividend 33 cents per share vs 33 cents a year ago
