Wesfarmers shares hit all time highs in trading yesterday as the company reported its last financial year sales, earnings and financial details ahead of the company changing spin-off of Coles later this year.
At the same time the company surprised by revealing that its head of department stores, Guy Russo was retiring from November 1 after 10 years turning Kmart into the country’s most successful department store chain and starting work on turning around the floundering Target chain.
That news was the real surprise of the day and will add pressure to Wesfarmers management not to allow the most successful retail recovery in recent years – Kmart – drift off track, especially if Target’s fortunes remain weak.
With Coles going later this year the department stores group becomes the second biggest source of sales and earnings after Bunnings and Wesfarmers will need to make sure the chains do not lose momentum.
Wesfarmers revealed better than expected underlying earnings yesterday, thanks to growth at Bunnings and Kmart, sending its share price surging to an all-time high. Coles meanwhile posted its best sales results in almost two years and better than forecast earnings for the year to June 30.
But it warned that higher staff costs could put further pressure on its earnings – that will be on top a rise in spending on store refurbishments that were allowed to slow under Wesfarmers (which was conserving cash).
Around an extra $1 billion will be needed to be spent updating the company’s stores which have grown dowdy compared to the new stores being revamped by rival Woolies. Wesfarmers shares jumped more than 4% to $52.70 before settling back to end at $52.20, up 3.2% on the day.
That was a record and came despite confirmation that 2017-18 wasn’t the best year for the company with the billion dollar loss on its brief UK hardware adventure and another write down at Target.
Wesfarmers’ full-year net profit plunged 57% to $1.2 billion in the year to June thanks to its disastrous attempt to expand Bunnings into the UK and Ireland.
The retail giant reported impairments of $1.4 billion related to the Bunnings US adventure, a $306 million write-down in Target, and a $123 million gain from the disposal of its Curragh mine. Excluding significant items, net profit from continuing operations rose 5.2% to $2.9 billion.
At Coles, its largest business, comparable food sales grew 1.8% in the three months to July 30, which is its best result since the first quarter of financial 2017 and follows six quarters of being trounced by rival Woolworths.
Coles said comparable food and liquor sales for the full 2018 year increased 1.1%, up from 1% growth in 2016-17, while total revenue was up 1.6%, driven by more sale transactions and bigger basket sizes..
Coles’ earnings before interest, tax and depreciation fell 6.8% to $1.5 billion, after falling 14% in the December half and improving 3% in the normally tougher (for retailing) June half.
Wesfarmers said sales momentum had continued to build into the first quarter of 2019, driven by the popular Little Shop toy giveaway, but that earnings pressure would not abate.
“The underlying supermarkets business is expected to continue to improve, but earnings will be impacted by the annualisation of additional team member costs,” said the company, which introduced a new wage deal at Coles this year that includes higher penalty rates.
“These additional costs are expected to be largely offset by cost efficiency benefits.”
Bunnings and Kmart, two of the business being retained, starred.
Bunnings’ comparable sales in Australia and NZ jumped 7.8%, total sales were up 8.9%, and its earnings grew 12.7% to $1.5 billion.
Kmart’s grew comparable sales by 5.4% and total sales by 8%. Earnings from the department store division – which includes Target – jumped 21% to $660 million. Target’s weak sales growth showed signs of turning around with the rate of fall in both topline and comparable sales more than halving.
Officeworks’ earnings of $156 million were 8.3% higher than the prior year, with revenue growth of 9.1%, while Industrial earnings from continuing operations increased 13.1% to $680 million.
