The Coles Group purchase, criticised four years ago by some analysts, continues to pay off for Wesfarmers and its shareholders.
Wesfarmers bought Coles in a complex deal back in late 2007, with nearly all commentators and many analysts bagging it.
Wesfarmers seems to be having the last laugh now.
The company yesterday revealed a 33% rise in first-half earnings, thanks to the better performance of its retail arms, Coles Group and Bunnings, plus higher returns from its coal division (despite production and sales cuts because of the wet weather).
Net profit rose to $1.173 billion in the six months to December 31, from A$879 million a year earlier.
Investors initially liked the strong result and confident outlook from the company, sending the shares up to a new 52 week intra day high of $35.25, but they then got tired of being bullish and took profits and sold the shares down into the red where they ended off 9c at $34.25.
That fall was also despite shareholders having been rewarded with a solid 18% jump in interim dividend to 65c a share from the 55c a share paid for the December 2009 half.
(A very different market reaction to Qantas.)
And Wesfarmers reckons that its second half will see further gains, again despite the impact of floods in Queensland and Cyclone Yasi which could cost it over $30 million and more than $100 million for the full year.
The company told the market that a strong performance of the group’s businesses in the first-half provided a "solid foundation" for the remainder of the 2011 financial year.
"Overall, the group continues to be optimistic about the future performance of its retail businesses, particularly given the opportunity to extract further improvements from the turnaround businesses of Coles, Kmart and Officeworks," the statement said.
"In the short term, trading is expected to remain challenging, especially for the group’s department store retailers given ongoing price deflation, driven by a competitive retail environment and comparatively strong Australian dollar."
Wesfarmers predicts second-half retail earnings will be negatively affected by the severe flood and storm events and cyclone Yasi in January and February.
"The majority of affected retail locations have resumed trading, however, a small number of locations are expected to remain closed for some months as extensive repairs take place," the company said.
"To date, write-downs of damaged plant, equipment and inventory are estimated to be $40 to $50 million with business interruption costs estimated to be between $30 to $40 million."
Wesfarmers said the second half would be affected by costs and lost earnings of around $30 to 35 million due to the floods.
The headline grabber for Wesfarmers has been the strong performance by Coles supermarkets which did better than larger rival Woolworths in the sales battle in the December half year.
And a 30% rise in global coal prices helped the company’s Curragh coal mining businesses, despite the impact of the flooding which cost production and sales in the December quarter.
Wesfarmers’ shares have risen over 9% so far in 2011, ahead of the market which is up nearly 4% and Woolies, whose shares are off 1.5%.
In an extensive outlook statement, Wesfarmers said:
"There are still many opportunities to generate improvements in the business, including lowering costs and waste by continuing to optimise the supply chain, improving operational standards, increasing productivity, enhancing freshness and investing in the network.
"Bunnings is well positioned for continued sales growth with good progress being made in further strengthening the business’ key strategic pillars and network expansion given the strong property pipeline in place.
"Officeworks remains focused on reinvigorating the business with further investment planned to enhance the customer offer and expand the network.
"Within the Group’s department store retailing businesses, Target is continuing to progress the implementation of new disciplines and processes to ensure that the business remains differentiated, while Kmart remains focused on refining its ‘everyday family items’ product offering and ensuring that its sourcing and cost of doing business supports its lowest price position.
"Earnings for the Insurance division will be affected in the second-half by claims associated with the severe flood and storm events during January and February which cumulatively are expected to be approximately $30 to $35 million. Underwriting performance before one-off events is expected to continue to benefit from improved risk selection and portfolio remediation.
"The long-term outlook for the Resources division is positive.
"Higher fourth quarter export coal prices appear likely given the widespread supply shortfall due to record rains across the Bowen Basin, however, the benefits will be somewhat tempered given difficult mining conditions, industry cost pressures and carryover tonnage.
"Sales volumes for the Curragh mine for the full-year are expected to be in the range of 5.8 to 6.2 million tonnes of export metallurgical coal, subject to a return to more historically normal weather patterns.
"The Group’s other industrial businesses are well positioned to take advantage of stronger conditions in industrial mark
