Coles and Bunnings continue to boost Wesfarmers earnings
Wesfarmers has announced a solid increase in underlying profit for the year ended 30 June 2014, with an operating revenue of $62.3 billion, an increase of 4.2 per cent on the previous year, and EBIT of $4,150 million, an increase of 13.4 per cent on the previous year. The Group’s net profit after tax was $2,689 million, an increase of 18.9 per cent on the previous year.
The Food and Liquor division of Coles reported revenue of $29,220 million, up 4.6 per cent on the previous year.
Wesfarmers reported that the underlying earnings growth was largely driven by stronger performances from supermarket group Coles and home improvement group Bunnings.
“Another strong year for Wesfarmers in our centenery year, with revenue up just over 4 per cent and excluding non-trading items, our profit up to just over 6 per cent,” said Richard Goyder, Managing Director Wesfarmers Limited.
“The Group has got great growth prospects,” Mr Goyder said. “We’ve got a balance sheet that’s really well structured and geared at the moment,” he said.
“We’ve got an A minus credit rating and the payment of this capital return we think enables us to maintain that comfortably, and also gives us great flexibility to look at investment opportunities as they arise,” Mr Goyder said.
“The outlook for Wesfarmers is really positive, particularly in our retail businesses,” Mr Goyder said. “We’ve got good momentum in four of them — in Coles, Bunnings, Kmart and Officeworks. And the turnaround work that we’re doing in Target gives me confidence as well,” he said.
Supermarket group Coles reported revenue of $37,391 million for the year ended 30 June 2014, up 4.5 per cent on the previous year. The Food and Liquor division reported revenue of $29,220 million, up 4.6 per cent on the previous year, and Convenience revenue was $8,171 million, up 4.1 per cent on the previous year.
Wesfarmers said Coles earning growth was driven by improvements in customer value, increased fresh sales, a better store experience and lower costs of doing business.
Coles Managing Director John Durkan said costs of living continued to grow for Australian households, and Coles was faced with increasingly competitive market conditions. He said Coles customers remained “cautious and value conscious” and that Coles was facing increasing cost pressures.
Coles’ strategy will be to have a stronger focus on customers, continue to invest in value and fresh to drive sales, focus on simplifying and reducing costs, maintain disciplined and returns-focused capital management, invest in new channels and services to drive long-term growth, and progress the transformation of its liquor business.
Focus on ‘value, freshness and innovation’
Coles said it had continued ‘value leadership’ with its ‘Celebrate Specials’ and ‘Deeper Down Down’ promotions, along with targeted value offers with ‘spend get cash’, ‘spend get points’ and ‘choose your offer’. Coles plans greater investment in trusted pricing going forward.
Coles said it had made further investment in fresh food and innovation, by supporting Australian suppliers with longer term, more collaborative relationships, including the new 10 year contract with Murray Goulburn to supply Coles brand milk to over 400 stores. Coles will trial new formats and displays such as scoop and weigh, and open bread displays.
Simplify supply chain and operations
Coles said it had simplified in-store operations, with more than 430 stores taking up the ‘Easy Ordering’ for meat and bakery. Coles also rolled out fresh produce ‘Assisted Ordering’ and reduced queue time with more than 5,000 assisted check-outs across 633 stores.
Expansion into new channels and services
Coles expanded into financial services with an agreement to form a financial services joint venture with GE Capital Australia in August 2014, and the launch of multiple new products launched such as ‘no fee’ credit card, life insurance, Coles Mobile Wallet.
Coles reported strong growth in Coles Online following its re-launch, with new customers up 48 per cent and traffic up more than 70 per cent in the 2014 financial year.
Delivery of better supermarket store network
Coles reported continued sales density growth, rebalancing ‘macro space’ layouts to optimise sales. It said it continued to work towards a “fully renewed fleet” of stores, with 418 stores in the renewal format, representing 55 per cent of the fleet. Coles launched eight food service superstores in the 2014 financial year.
Coles reported that its liquor business continued to underperform. But the supermarket group said it was beginning the ‘liquor transformation’, which included a detailed review to guide development of action plans. Coles commenced closure of underperforming stores, and progressed with range rationalisation through clearing inactive stock.
Coles reported that more work was required to improve the customer offer and experience.
Growth in Coles Express convenience channel
Coles reported lower fuel volumes following reduced fuel docket discounts and higher fuel prices, but improved shop sales with a better customer offer. Coles said its new ‘Expresso to Go’ and frozen carbonated beverages performed strongly.
Coles said it would continue its focus on convenience offer growth, and quality network expansion. Coles Express opened 11 new sites in the 2014 financial year, and closed 5 sites.
Wesfarmers reported strong earnings growth in the Bunning business, with improved sales momentum and growth in all regions and customer segments. Revenue was $8,546 million up 11.6 per cent on the previous year.
John Gilliam, Managing Director, Home Improvement and Office Supplies, said Bunnings saw total store sales growth of 11.7 per cent, good momentum in consumer and commercial, and store-on-store growth of 8.4 per cent. Mr Gilliam said it was expected that at least 20 Bunnings warehouse stores would be opened in the 2015 financial year.
Wesfarmers reported ‘pleasing’ revenue growth of 4.6 per cent to $1,575 million in the 2014 financial year.
Mr Gilliam said the growth came from sound execution of the ‘every channel’ strategy, category innovation and working capital improvements, and strong improvements in earnings and return on capital.
Wesfarmers reported revenue for its Kmart business of $4,209 million, up 1 per cent on the previous year.
Guy Russo, Kmart Managing Director, said earnings growth was driven by further improvements in merchandising and store productivity, further growth in customer transactions and units sold, and accelerated renewal activity.
Wesfarmers opened five new Kmart stores and three new Kmart Tyre and Auto Service centres in the 2014 financial year, and completed 16 major Kmart store refurbishments.
Department store business Target continued to see lower margins from price deflation in a strongly competitive market. Revenue for Target was $3,501 million, down 4.3 per cent on the previous year.
Stuart Machin, Target Managing Director said the 2014 financial year had been challenging year with earnings affected by progressive introduction of a ‘first price, right price’ strategy resulting in price deflation ahead of sourcing benefits. Mr Machin said the Company had implemented many changes to “fix the basics”, and that the adverse earnings impact was offset by a number of benefits which are not to be repeated.
Wesfarmers’ Chemicals, Energy and Fertilisers business reported revenue of $1,812 million, up 0.4 per cent on the previous year.
Wesfarmers said the AN3 capacity expansion construction completed within time and to budget, but that chemical earnings affected by planned and unplanned plant shutdowns. Kleenheat Gas earnings affected by continued deterioration in LPG production economics.
Wesfarmers reported revenue of $1,544 for its Resources division, up 0.3 per cent on the previous year. Wesfarmers said lower export coal prices affected revenue.
Industrial and Safety
Wesfarmers said challenging industrial supply market conditions saw revenue for its Industrial and Safety division drop 1.6 per cent to $1,621 in the 2014 financial year.
Wesfarmers said growth in Coles personal lines, improved loss ratios and favourable claims experiences in Australian underwriting contributed to earnings growth in its Insurance business, reporting revenue of $2,167 million, up 4 per cent on the previous year.