Coles and Bunnings strong performance boost Wesfarmer’s half-yearly results
Coles’ parent company Wesfarmer’s Limited (Wesfarmer’s) has announced a net profit after tax of $1,429 million for the half-year ended 31 December 2013, up 11.2 per cent on the previous corresponding period.
Wesfarmers said a highlight for the period was strong performance from both supermarket group Coles and home hardware group Bunnings.
Included within this result was a gain on sale of the Wesfarmer’s 40 per cent interest in Air Liquide WA (ALWA), which was partially offset by an increase in reserve estimates for the 22 February 2011 Christchurch earthquake (EQ2). Adjusting for these, net profit after tax for the half-year increased 6.3 per cent.
Managing Director Richard Goyder said he was pleased with the increase in the Group’s profit, given the challenging conditions experienced by the Resources and Industrial and Safety divisions, and reduced earnings recorded at Target.
“The strong performance of our retail businesses, excluding Target, underpinned the increased earnings achieved by the Group,” said Richard Goyder, Wesfarmer’s Managing Director.
“Good growth in Coles’ earnings highlighted its successful transition to the next phase of growth, building on the solid foundation established during its initial turnaround plan,” Mr Goyder said. “I am also delighted with the smooth leadership succession at Coles which we announced yesterday,” he said.
“The result achieved at Bunnings was also strong, with the business continuing to execute its strategic agenda to plan,” Mr Goyder said.
Wesfarmer’s announced last week that current Coles Managing Director, Ian McLeod, would move to a senior role within the wider Wesfarme’s Group. John Durkan, currently Coles Chief Operation Officer, is set to replace Mr McLeod as Managing Director from 1 July 2014.
Coles strong earnings growth
The Coles supermarket group delivered strong earnings growth of 10.7 per cent to $836 million for the half, with return on capital increasing 80 basis points to 10 per cent.
Coles’ strategy of investing savings from efficiencies into lower prices, while improving quality and service, drove increased customer transaction and basket size. Solid productivity improvements were made across the supply chain, stores and store support centre.
Bunnings earnings increase
The Bunnings business recorded a very good result, with earnings up 8.5 per cent to $562 million.
Wesfarmer’s said growth in transactions at its Bunnings stores was achieved as customers responded positively to Bunnings’ ongoing investment in value and improvements in range and service. Growth was achieved within all trading regions and across both consumer and commercial customer segments.
Office supply business Officeworks achieved growth of 10.5 per cent to $42 million. Improved sales momentum was recorded during the half, as strategies across Officeworks’ every channel offer gained traction. Earnings growth was also supported by reduced operational complexity and lower costs of doing business.
Kmart and Target
Discount department store group Kmart recorded earnings growth of 5.7 per cent to $260 million for the period. Wesfarmer’s said customers continued to respond favourably to Kmart’s strategy of providing “the lowest prices on everday items for families”, which resulted in another period of price deflation. Earnings growth was driven by further improvements in merchandising and a strong focus on cost efficiency.
The Target group, however, reported earnings of $70 million, 52.7 per cent below the prior corresponding period. Wesfarmer’s said trading conditions were challenging due, in particular, to the continued clearance of aged and excessive winter stock, which also affected the timing of the summer range launch. In addition, Wesfarmer’s said the decision not to repeat increasingly high levels of promotional activity of the prior year had a short-term adverse effect on trading.
More positively, at the end of the period, inventory levels were below the same time in the previous year and had an improved seasonality profile.
“As foreshadowed, Target’s earnings were significantly affected by clearance activity during the half,” Mr Goyder said. “Importantly, good progress was made in renewing its senior leadership team to improve organisational capability to oversee the turnaround of the business,” he said.
Wesfarmer’s said its Resources division reported earnings of $59 million, 36.6 per cent below the prior corresponding period due to lower export coal prices, particularly relative to the first quarter of the 2013 financial year.
Production performance during the half improved, with aggregate divisional product 6.2 per cent higher than the prior period, and costs were further reduced at both the Curragh and Bengalla mines.
Wesfarmer’s reported that its Insurance division recorded earnings of $99 million, 4.8 per cent below the prior corresponding period, with results affected by a $45 million increase in reserve estimates for EQ2. Excluding EQ2, underlying earnings increased strongly by 38.5 per cent to $144 million. Improved underwriting performance was supported by disciplined risk selection and premium rate growth across personal and commercial lines.
Broking earnings growth was solid, driven by the performance of the New Zealand business.
During the half the Group announced the agreement to sell the Australian and New Zealand underwriting operations of its Insurance division to Insurance Australia Group for $1,845 million. The sale remains subject to regulatory approvals.
“The divestment of the Insurance division’s underwriting operations, which remains subject to regulatory approvals, and the disposal of Wesfarmers’ 40 per cent interest in ALWA, demonstrate the Group’s ongoing focus on disciplined portfolio management, having regard to the best interests of shareholders,” Mr Goyder said. “I thank the teams involved in these businesses for their significant efforts over many years,” he said.
Chemicals, Energy and Fertilisers
The Chemicals, Energy and Fertilisers division reported earnings of $205 million for the half, $101 million above the prior corresponding period. Excluding a $95 million gain on sale of the 40 per cent interest in ALWA, underlying earnings increased 5.8 per cent.
Earnings in the chemicals business were in line with the prior period, while the contribution from Kleenheat Gas increased as a result of higher international LPG prices. Earnings from the fertilisers business reduced due to lower sales volumes following a dry June, which resulted in reduced fertiliser application rates.
Industrial and Safety
The Industrial and Safety division recorded earnings of $73 million, 17 per cent below the prior corresponding period. Industry supply market conditions remained challenging throughout the period, with customer and project activity reduced across most customer segments.
“Earnings for the Resources and Industrial and Safety divisions were adversely affected by challenging market conditions,” Mr Goyder said. “The industrial divisions continued to focus on cost control and, in the case of the Chemicals, Energy and Fertilisers division, the commissioning of the nitric acid/ammonium nitrate capacity expansion at Kwinana (NA/AN3),” he said.
Group cash flow and expenditure
The Group’s first half operating cash flows of $1,757 million were $450 million or 20.4 per cent below those recorded in the prior corresponding period, with cash realisation of 88.5 per cent recorded. Cash realisation was below the prior year, mainly due to the January 2014 settlement of the sale of the Group’s interest in ALWA and lower cash inflows from working capital improvements across the retail portfolio.
Gross capital expenditure for the Group was $1,160 million, 12.3 per cent or $163 million below the prior corresponding period due to lower property investment by Coles and Bunnings. Net capital expenditure for the half was significantly below that of the prior year, reducing $563 million or 50.3 per cent due to increased retail property disposals.
Free cash flows of $1,016 million for the half were 0.9 per cent above the prior period, with reduced net capital expenditure offsetting lower operating cash flows.