Wesfarmers had made it clear that its relationship with its banks won’t be hit by yesterday’s big $2.3 billion of write-downs and losses, and has made clear that shareholders will not feel any pain.
The group emphasised the non-cash nature of the impairments at the stumbling Target department store chain and the Curragh coal mining operation in Queensland.
The news sees Wesfarmers join Woolworths in revealing massive losses on the write-down of non performing assets. In February Woolworths took $3.25 billion ($1.898 billion net) in charges against its stuttering hardware business.
That means the total impairments between the two for the year to June 30 will be over $5.6 billion.
“The accounting impairments in Target and Curragh, which will be finalised as part of the Group’s FY2016 annual accounts, are non-cash in nature, have no effect on current trading and will not impact the Group’s compliance with its banking covenants, Wesfarmers told the ASX.
“It is intended that the Group’s final dividend for FY2016 will be determined based on the Group’s net profit after tax (NPAT) excluding the above impairment charges, and will be made in accordance with Wesfarmers’ existing dividend policy,” yesterday’s statement said.
That’s despite the write-downs possibly wiping out the expected 2015-16 profit which will be announced in mid-August.
The company should have more to say at its investor day on June 22.
Investors took the news in their stride and the shares dipped 0.1% to $41.90, in a market that jumped by well over 1% in an unusually optimistic burst of trading.
Wesfarmers will take a non-cash impairment of between $1.1 billion and $1.3 billion pretax ($1.08 billion to $1.28 billion post-tax) on the value of its Target chains, mainly on the value of goodwill.
Seeing a $680 million cut was announced nearly two years ago, the value of Target in the Wesfarmers’ balance sheet has now been written down to zero.
The write-down reflects the lower value of the discount department store after a rapid decline in sales and earnings. The recent rebates profit scandal was the last straw for management at Wesfarmers who have announced that target will be merged into the Kmart chain in a new business to be overseen by Kmart CEO Guy Russo.
Wesfarmers will also book $145 million in “restructuring costs and provisions” associated with Target, which is expected to lose $50 million before interest, tax and one-off costs this year due to high seasonal clearance activity and lower gross margins (in other words, price cutting as the chain tries to get rid of unwanted stock).
Wesfarmers will also take a non-cash impairment of between $600 million and $850 million pretax ($420 million to $600 million after-tax) against its Curragh coal business.
The total write-downs and restructuring costs, which could be as high as $2.29 billion pretax and $2.03 billion post tax, will wipe out most of Wesfarmers’ bottom-line profits this year. Broking analysts had been expecting net profit before one-off costs to fall to about $2.39 billion this financial year from last year’s $2.44 billion.
"Curragh’s recoverable value remains very sensitive to future currency and export coal price assumptions, and low cost production provides scope for improvement in financial performance should coal revenues improve," Wesfarmers said in a statement.
CEO Richard Goyder said the write-downs “reflect more difficult market conditions in both Target and Curragh, but we remain confident that operationally we have the right plans to improve future performances over time”.
“Whilst Target has made operational progress in recent years, market competition and disruption has continued to accelerate, including from the very strong performance of Kmart," he said.
Mr Goyder said the write-downs were non-cash, but Wesfarmers was unable to offset the Target impairment against the higher values for other parts of the Coles business because of the way the write-down had to be done.
