Coles turnaround gathers pace

Eli Greenblat
February 16, 2012
The Age

Perth-based conglomerate Wesfarmers has reported flat half year profit growth of only 0.3 per cent to $1.176 billion after its insurance arm was affected by a high level of catastrophe claims and increases in reserves.

However, the company’s flagship Coles supermarket division has continued to improve despite the tough retail trading environment.

Wesfarmers said today that its operating revenue rose 5.7 per cent to $29.674 billion and that excluding the impact of one-offs its profit was up by 5.2 per cent.

The company, which also owns hardware group Bunnings and operates an industrial safety and mining division, has increased its interim dividend by 7.7 per cent to 70 cents per share.

Its share price still fell to be down 69 cents, or 2.3 per cent, at $29.16 around midday.

The Coles turnaround gathered pace and was underpinned by a strong customer response to improvements in value, quality and service, Wesfarmers said.

For the half Coles earnings before interest and tax (EBIT) lifted 14.1 per cent to $656 million while Bunnings posted a 6.1 per cent increase in pre-tax earnings to $485 million.

Its other retail businesses had a mixed performance, in line with the challenging retail environment, with merchandise business Target reporting a 9.7 per cent dive in EBIT to $186 million but Kmart up 12.6 per cent to record an EBIT of $197 million.

‘‘Earnings (at Target) were affected by lower customer numbers and reduced margins due to heightened promotional activity in the market,’’ Wesfarmers said in a statement to the ASX.

The company said changes to Target’s promotional program late in the half resulted in improvement in December trading.

Wesfarmers resources division, dominated by coal, had flat earnings of $250 million.

Outlook positive

Wesfarmers chief executive Richard Goyder said that although the retail trading environment was expected to remain subdued in the second-half, the outlook for the group remained positive.

‘‘We anticipate continued improvement from the group’s retail businesses, increased export coal sales volumes, following the completion of the current expansions, and a better insurance division result, on the basis of a return to a more normal pattern of claims,’’ he said.

He said in the short term the trading environment would be marked by subdued consumer confidence and high levels of price deflation, particularly fresh produce deflation in supermarkets.

Strong growth at Coles

Revenue at Coles, the engine of Wesfarmers’ earnings, rose to $17.2 billion for the first half, up 7.2 per cent, with its EBIT of $656 million growing at twice the rate of sales over the period. Return on capital for Coles rose 110 basis points to 8.2 per cent.

The company said its competitive offer during Christmas helped drive a record 17 million customer transactions in the week leading up to Christmas, an increase of one million customers on the previous year.

egreenblat@theage.com.

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