While its Bunnings and Officeworks chains have had a good pandemic, a write-down on the value of its struggling target chain saw Wesfarmers report lower earnings for the year to June.
Wesfarmers warned of the impairment in a statement in late April which also revealed plans to revamp Target and its Kmart chains with the latter becoming the main business in this sector.
Wesfarmers said Target would be retained as a separate chain and name but within the Kmart group. Kmart will spend more than $120million on the continuing revamp in 2020-21.
Wesfarmers reported a 16.4% fall in profit from continuing operations to $1.62 billion on revenue up 10.5% to $30.8 billion for the year.
Wesfarmers is now in the process of revamping and closing around 75 stores and converting another 92 into Kmarts as it tries to reduce the discount chain’s ‘unsustainable’ cost base.
Wesfarmers booked a pre-tax impairment of $525 million for the restructuring, along with $110 million in associated costs and provisions. Wesfarmers also made a $310 million impairment of its industrials and safety division, which operates businesses such as Blackwoods.
The write-downs were partially offset by the $510 million profit on the company’s sale of Coles shares earlier this year and by a revaluation of its retained 4.9% stake in the supermarket chain.
Taking into account Wesfarmers’ $3.1 billion gain from the Coles demerger and other asset sales, which occurred in the prior financial year and had massively inflated last year’s profit, statutory net income fell 69.2 percent.
Excluding all significant items, earnings were up 8.2% to $2.1 billion.
“COVID-19 and the bushfires last summer had a significant impact on our customers, team members, and the communities in which we operate during the 2020 financial year,” CEO Rob Scott said in the statement on Thursday.
“The group’s result is a testament to the dedication of team members and leaders across all businesses who have been highly effective in responding to the changing needs of customers and supporting their local communities.”
“Bunnings, Kmart, Officeworks and Catch delivered strong sales growth for the year,” Mr. Scott said.
“Earnings in Bunnings and Officeworks were particularly strong and demonstrated the ability of these businesses to rapidly adapt to the changing needs of their customers. Earnings across all businesses reflected accelerated investment in digital capabilities and additional costs associated with operating in a COVID-19 environment.
Bunnings was again the star with earnings up 13.9% to $1.85 billion (on revenue of $15 billion, up 13.9%). Officeworks also performed well, with profits up 13.8% to $197 million on a 20.4% jump in revenue to $2.787 billion. Kmart lost $222 million (because of the revamping of Target and other changes on sales of $9.217 billion, up 7.2%.
“The result in Chemicals, Energy, and Fertilisers (WesCEF) reflected a continued solid performance, while the performance of Industrial and Safety was below expectations and included a $310 million pre-tax impairment as a result of the deterioration in the outlook for customer demand in some segments and uncertainty around future economic conditions.
“The Group’s retail businesses delivered total online sales growth of 60 percent during the year, excluding Catch,” Mr. Scott said.
“Total online sales across the Group, including the Catch marketplace, increased to $2.1 billion. This reflects the significant investment in digital capabilities over recent years, as well as the continued change in customer preferences towards online shopping.”
Wesfarmers has been forced to temporarily close 168 stores across its divisions in Victoria due to the state’s strict stage four lockdown, though the retailer was hoping to land an exemption from the government to allow it to continue trading.
The company said while sales had been strong across the country through the start of the new financial year, stage four restrictions were having an impact, particularly for Kmart and Target.
Wesfarmers declared a final dividend of $1.52 a share, along with an additional 18 cent special dividend from the selldown of its Coles shares, making the total $1.70 a share.
“In response to the high level of uncertainty associated with COVID-19, the Group took actions to maintain significant balance sheet flexibility, with net cash of $471 million at the end of the year reflecting disciplined capital allocation, a strong operating cash flow result, as well as proceeds from the partial sale of the Group’s interest in Coles. The Group maintains committed bank debt facilities of $5.3 billion, providing significant funding capacity,” directors added.
Wesfarmers also revealed that it had made its mind up on the future of Target – it will survive but in a different form.
“During the year, the Group outlined plans to accelerate the growth of Kmart and address the unsustainable financial performance of Target.
“The Kmart Group result includes pre-tax significant items of $635 million, relating to the conversion of Target stores to Kmart stores and associated actions to simplify the Target business.
“Good progress has been made on executing the actions announced in May 2020,” Mr. Scott said.
“Subsequent to the end of the 2020 financial year, the strategic review of Target was concluded. The review determined that the best commercial outcome is for Target to continue to operate as a largely standalone business within the Kmart Group while executing the previously announced network reductions.
“The strategy for Target will continue to prioritise online growth, with a focus on improving the product offer in the destination categories of soft home and apparel. In addition, a disciplined approach to capital allocation will result in a progressive reduction in the size of the store network over time.
“While accounting standards require us to recognise an impairment of assets within Target to implement the restructuring and store conversions, these actions will allow us to enhance the overall value of the Kmart Group and further strengthen Kmart,” Mr. Scott said.
Wesfarmers shares eased 0.2% to $48.78 on a day when the wider market was down almost 0.8%.
