Perth-based conglomerate Wesfarmers has been well and truly captured by its reviving Coles supermarket business, as well as its still well-performing Bunnings home improvement operation.
Yesterday’s interim sales and profits figures from Wesfarmers makes it clear that Coles supermarkets are now the earnings and profit powerhouse for the group, followed by Bunnings.
And there are signs that the Kmart discount chain is back in the game, along with Officeworks, although Target’s profits are still weak.
Coles and Bunnings have supplanted Wesfarmers resources division (mostly coal in Queensland and NSW) which is fading as world coal prices, especially those paid by Chinese and Asian steelmakers fall, along with demand, and its group of industrial businesses, led by insurance, which had a bad half year (as forecast late last year).
Overall, Wesfarmers reported flat interim profit growth of only 0.3%, to $1.176 billion, after its insurance arm was affected by a high level of catastrophe claims and increases in reserves.
Despite that static outcome, directors lifted interim dividend to 70c a share from 65c, a rise of 7.7%, because the board sees a better second half with the insurance business over its surge in claims and disaster-related costs.
But investors ignored the positives from the retailing side and sent the shares down 2.6% or 78c to $29.07.
That was in a market off 60 points or well over 1% on renewed concerns about Greece, which made every stock susceptible to a sell-off yesterday.
Revenue for the half was up 5.7% to $29.674 billion and excluding the impact of one-offs, underlying profit was up by 5.2%.
For the half year Coles lifted earnings before interest and tax (EBIT, the best profit measure for retailers) 14.1% to $656 million while Bunnings posted a 6.1% increase in pre-tax earnings to $485 million: that’s a total of $1.141 billion.
The other retail businesses had a mixed performance with Target reporting a 9.7% fall in EBIT to $186 million.
Officeworks improved, earning $34 million, up 9.1% for the half and despite severe price deflation on electronics and computer products.
But Kmart said its EBIT jumped 12.6% to a record $197 million as the turnaround wrought by former McDonalds boss Guy Russo grows.
Kmart said its EBIT to sales margin, a key measure of retailing performance and profitability, rose to a solid 8.6% for the half year.
Wesfarmers’ resources division, dominated by coal (and the Curragh mine in Queensland), had flat earnings of $250 million and will struggle to match the 2011 performance because of the fall in global coal prices and the continuing strength of the Australian dollar.
The Insurance division reported earnings of $17 million, significantly below the $65 million reported for the 2011 first half.
Earnings were affected by a high level of catastrophe claims across the industry, a $26 million increase in reserves required for the February 2011 Christchurch earthquake as well as higher crop claims and reinsurance costs from 1 July 2011.
The Chemicals, Energy and Fertilisers division reported a 10% fall in underlying earnings to $99 million and the Industrial and Safety division’s result for the first half was strong, with earnings growth of 22.8% to $97 million.
Other businesses, non-trading items and corporate overheads reported an expense of $84 million, compared to an expense of $73 million in the previous corresponding period.
Non-trading items for the period reduced earnings by $30 million.
This included a $181 million non-cash write-down of the carrying value of Coregas following the significant restructure of BlueScope Steel’s Port Kembla operations.
The write-down was partially offset by a gain of $151 million associated with the disposals of the Premier Coal mine, the enGen business and Boddington forestry assets.
CEO Richard Goyder said it was a good result to increase the Group’s underlying profit by 5.2%, especially given the challenging conditions experienced by the retail and Insurance divisions as well as extra costs associated with flood recovery efforts and the expansion of the Curragh coal mine.
“Continuing improvements in the turnaround retail businesses of Coles, Kmart and Officeworks were evident.
"These businesses reported strong increases in customer numbers and unit volumes sold, as well as further gains in operating efficiencies, reflecting in combined earnings growth of 13.4 per cent for these businesses,” Mr Goyder said.
Mr 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 added.
The results at Wesfarmers were in total opposition to those reported yesterday by Qantas, which again grabbed the headlines by announcing the loss of around 500 jobs.
That followed a review of its maintenance and catering businesses, early retirement of aircraft and the ditching of two international routes.
The redundancies are part of cost cutting aimed at countering what the airline says is increased economic volatility here and offshore.
"We anticipate there will be 500 positions affected by the immediate changes that we have announced today,"
