Wesfarmers (WES) has joined the growing list of companies large and small lifting dividend payouts to shareholders after reporting a better than expected first half profit yesterday.
The company, which owns the Coles supermarkets chain, Bunnings, Target, Kmart and a collection of small retail and industrial businesses, also was upbeat about the outlook for the rest of the year.
It was the best of three retailers to report yesterday – newbie Dick Smith (DSH) did better than its prospectus estimates, despite weaker sales growth, while The Reject Shop (TRS) cut its dividend after confirming a slide in profits and weak sales growth.
From the comments yesterday, Wesfarmers’ higher earnings was down to strong performances by Coles, Bunnings and then Kmart.
The company declared a half year dividend of 85 cents per share, payable on April 2, up from the payout of 77 cents for the same time last year.
This was on top of the $579 million capital return revealed last November 2013 of 50 cents per fully-paid ordinary share and partially protected share which was accompanied by a proportionate share consolidation.
In December 2013, Wesfarmers’ partially protected shares were reclassified into ordinary shares on a one for one basis, following the satisfaction of criteria for reclassification consistent with the terms of the partially protected shares.
So all up the December half year was a very profitable one for shareholders.
But investors didn’t care and the shares lost half a per cent to end at $43.18.
WES Vs WOW 1Y – Wesfarmers lifts dividend on solid profit rise
Wesfarmers said yesterday earnings before interest and tax rose 5.4% to $2.154 billion, while on an after tax basis, net profit rose 11.2% of $1,429 million for the half.
That figure included within this result was a gain on sale of the Group’s 40 per cent interest in Air Liquide WA (ALWA), which was partially offset by an increase in insurance reserve estimates for the 22 February 2011 Christchurch earthquake (EQ2). Adjusting for these, net profit after tax for the half-year rose 6.3%, according to the company.
Wesfarmers said Coles delivered strong earnings growth of 10.7%, to $836 million for the half, year with return on capital increasing 80 basis points to 10.0%.
"Coles’ strategy of investing savings from efficiencies into lower prices, while improving quality and service, drove increased customer transactions and basket size. Solid productivity improvements were made across the supply chain, stores and store support centre," the company said.
The Bunnings hardware chain recorded another very good result with earnings up 8.5% to $562 million (Woolies move into the sector isn’t having an impact yet).
"Growth in transactions was achieved as customers responded positively to Bunnings’ ongoing investment in value and improvements in range and service.
"Growth was achieved within all trading regions and across both consumer and commercial customer segments," Wesfarmers said.
Officeworks, which is paired with Bunnings in the Wesfarmers structure, saw earnings grow 10.5% to $42 million.
"Improved sales momentum was recorded during the half, as strategies across Officeworks’ every channel offer gained traction. Earnings growth was also supported by reduced operational complexity and lower costs of doing business," the company said.
The Kmart chain recorded earnings growth of 5.7% to $260 million for the period.
"Customers continued to respond favourably to Kmart’s strategy of providing the lowest prices on everyday items for families, which resulted in another period of price deflation. Earnings growth was driven by further improvements in merchandising and a strong focus on cost efficiency," Wesfarmers said.
But it was another tough half year for the Target chain, the third in a row. The struggling department store group saw earnings plunge 53% to just $70 million for the latest six months.
"Trading conditions were challenging due, in particular, to the continued clearance of aged and excessive winter stock, which also affected the timing of the summer range launch. In addition, the decision to not repeat increasingly high levels of promotional activity of the prior year had a short-term adverse effect on trading.
"More positively, at the end of the period, inventory levels were below the same time last year and had an improved seasonality profile," Wesfarmers said.
The company’s Resources division reported earnings of $59 million, down 36.6% on the prior corresponding period due to lower export coal prices, particularly relative to the first quarter of the 2013 financial year.
"Production performance during the half improved, with aggregate divisional production 6.2 per cent higher than the prior period, and costs were further reduced at both the Curragh and Bengalla mines," the company told the ASX.
The Insurance division recorded earnings of $99 million, 4.8% below the prior corresponding period, with results affected by a $45 million increase in reserve estimates for second Christchurch earthquake.
"Excluding EQ2, underlying earnings increased strongly by 38.5 per cent to $144 million. Improved underwriting performance was supported by disciplined risk selection and premium rate growth across personal and commercial lines. Broking earnings growth was solid, driven by the performance of the New Zealand business," Wesfarmers said.
During the half the Group announced the agreement to sell the Australian and New Zealand underwriting operations of its Insurance division to Insurance Australia Group for $1,845 million. The sale remains subject to regulatory approvals.
Wesfarmers said its Chemicals, Energy and Fertilisers division reported earnings of $205 million for the half, which included a $95 million gain on sale of the 40% per cent interest in Air Liquide in WA. Underlying earnings, excluding the ALWA gain on sale, were $110 million, up 5.8%
Earnings for the Industrial and Safety division fell 17% to $73 million during the half. The company said that; "consistent with the second half of the 2013 financial year, market conditions continued to affect sales and margin due to lower customer activity in the mining, manufacturing and engineering construction sectors".
Looking to the rest of the financial year, Wesfarmers CEO Richard Goyder singled out the underperforming Target retail chain for mention in the outlook, as well as the company’s resources division which has been hit by the coal price fall and downturn in demand.
On Target’s woes he said; "a new management team at struggling merchandise chain Target would implement a strategic plan to turn around its performance, with the retail group’s earnings in the second half expected to be better than the same period last year. However, trading would remain ”challenging” as Target underwent significant change in order to achieve long-term and sustainable growth".
And the Resources division would be negatively impacted by the "recent softening in spot pricing for Australian export hard coking coal".
But Mr Goyder added that Wesfarmers would invest further in its online retail sites, with online activity from across its businesses generating $1.1 billion in sales for calendar 2013 (Woolies said its online sales rose 40% to more than $1 billion in calendar 2013).
WES 2014 Half-Year Results Presentation
