Wesfarmers profit hits the rocks

STEPHEN BARTHOLOMEUSZ
August 24, 2016
The Australian
Even though it was well-foreshadowed, the jarring effects of the impairments and losses from Target and the Curragh coal operation on Wesfarmers’ reported bottom line made for an ugly “un-Wesfarmers-like” result.
After the $1.3 billion of Target impairments, $145 million of Target restructuring costs, $850m of Curragh impairments and $310m of Curragh losses it is perhaps surprising that Wesfarmers even had a bottom line.
Its earnings, including significant items, were down 83.3 per cent from $2.44bn to $407m. Excluding the significant items, earnings were down 3.6 per cent to $3.35bn. Even on that basis it wasn’t a great result.
That’s despite solid performances from the three big retail businesses, Coles, Bunnings and Kmart.
Coles, driven by its core food and liquor business, which lifted sales 5.8 per cent (4.1 per cent on a comparable stores basis), grew its earnings before interest and tax by 4.3 per cent to $1.86bn.
There was a noticeable drop-off in the rate of sales growth in the final quarter, which Coles attributed to seasonal factors and meat deflation, but there may also have been an element of increased competition as Woolworths tries to get back into the game. Coles has continued to invest in price to drive volume and remain price-competitive with the fast-expanding Aldi — and to make it tougher for Woolworths to regain any momentum.
The Bunnings/Home Improvement division’s performance was, as usual, impressive. It increased EBIT 11.6 per cent to $1.2bn on an 8.1 per cent lift in comparable store sales within the Australasian business.
The result included four months’ contribution from the Homebase business in the UK but, after restructuring and repositioning costs of $25m, only $1m of earnings.
There has been a frenzy of activity occurring in the UK as the Bunnings team completely remakes the Homebase offer. But there was a note of optimism in the group’s description of the activity occurring within the UK, with trading in the first few months said to be steady despite the obvious and severe disruption occurring within the stores as they transition towards something resembling the Bunnings model.
The diversion of resources and attention to the UK doesn’t appear to have impacted the core Bunnings business, which lifted its return on capital from 33.5 per cent to 36.6 per cent.
Another positive note was produced by Officeworks, which continues to grow in size and significance. It lifted EBIT 13.6 per cent, to $134m, on an 8 per cent increase in sales, to $1.85bn.
Kmart, while now twinned with Target within a new department store division headed by Guy Russo, performed strongly with revenue up 14 per cent to $5.2bn and EBIT up 8.8 per cent, to $470m. Target, of course, dragged the division’s performance down, with sales growth of 0.5 per cent and a loss at the EBIT level (excluding the impairments but including the restructuring costs) of $195m.
As a division, the department stores had sales growth of 8.2 per cent to $8.65bn but suffered a 47.3 per cent decline in EBIT, to $275m.
The size of the sales base, which includes $3.5bn of Target sales, provides some indication of the potential if Russo can extract even a fraction of the performance he injected into a once profitless Kmart into Target, although the operating losses within Target — $50m — indicate the scale of the challenge.
With the rival BigW business also going through a major restructuring, the discount department store segment may well get tougher and more competitive over the next 12 months.
If one puts the group’s non-cash impairments and provisions to one side, it was the $310m of operating losses from Wesfarmers’ resources business, which had earned $50m the previous financial year, that really damaged the overall result and that continue to overshadow its prospects.
They weren’t a surprise, having been well foreshadowed, but Wesfarmers, because of the structure of the Curragh coal business, its contracts and its hedges, is finding it difficult to devise a way of ending or reducing the bleeding. If it had a sensible option it would have exercised it already. It continues to search for one.
Despite the issues within its portfolio of businesses, Wesfarmers has maintained its dividend and retains very solid balance sheet and cash flow metrics. There is a lot of work that will need to be undertaken successfully at Target, Curragh and the UK, however, if Wesfarmers to regain its once high-flying performance statistics and market rating.