August 22, 2019 / 2:05 AM / 4 months ago

UPDATE 3-Australia's Coles warns rival's 'Ooshies' collectables to pressure sales

* Hands out first special dividend as public company

* "Little Shop" promotion boost seen waning

* Shares up 4% (Recasts with plastic toy promotion; adds CEO comments)

By Byron Kaye and Mell Chun

SYDNEY, Aug 22 (Reuters) - Australia's second-biggest grocer Coles Group Ltd warned on Thursday it may struggle to grow sales because of competition for consumers from a wildly popular children's toy promotion offered by its bigger rival.

The tepid sales outlook came as the supermarket group posted a drop in full-year profit, but investors took it in their stride and sent its shares higher as the company also announced a special dividend.

Coles warned that sales next year could be hurt as its popular "Little Shop" promotional programme - where it gives away pint-size replicas of grocery items with purchases of more than A$30 - faces increased competition from a similar give-away programme of larger Woolworths Group Ltd.

Woolworths' plastic souvenirs, or "Ooshies", of Disney movie The Lion King has reached cult-like status in Australia, including media reports of people advertising the free items for sale for thousands of dollars.

"They are ... successful and they do generate sales and some profit," said Coles CEO Steven Cain on an analyst call, referring to both companies' schemes.

Coles's comments show the important role such promotions have come to play in Australia as two of the country's biggest companies try to keep shoppers from each other and from newer discounters like Germany's ALDI Inc amid an overall slowdown in consumer spending.

Coles, however, said it will cut its reliance on collectables over time.

"Our long-term plan is not to feature collector schemes as highly as they are today (but) we are where we are with these schemes at the moment," said Cain.

In its first annual results since being spun off as a standalone company last year, Coles said net profit fell 9.1% to A$1.43 billion ($968.4 million) for the year to end-June, largely due to one-off costs associated with its listing.

Pre-tax profit from supermarkets, a closely-watched measure, rose 2.2% to A$1.2 billion, broadly in line with analyst forecasts, with the company citing "successful collectable campaigns" as a reason for the growth.

Coles declared a special dividend of 11.5 cents a share, on top of a final dividend of 24 cents a share, sending the company's stock up as much as 4% while the broader market was up 0.4%.

"The special dividend is the sweetener and investors would be buying into it right now just to get exposure to it," said CPS Capital associate director Dale Raynes.

Tom Youl, an analyst at researcher IBISWorld, said grocers would probably scale back on collector freebies because they were costly and unsustainable, but would keep running points-based loyalty schemes.

"Coles and Woolworths will be doing a lot more analysis of their customer spending habits and shopping habits, and loyalty programs are a way for supermarkets to gather that information” he said. ($1 = 1.4767 Australian dollars) (Reporting by Byron Kaye and Mell Chun in SYDNEY and Rushil Dutta in BENGALURU; additional reporting by Ambar Warrick and Aditya Soni in Bengaluru; Editing by Darren Schuettler and Muralikumar Anantharaman)

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