Covid lockdowns saw Wesfarmers post a 2.9% drop in annual profit for the year to June, with unwanted assistance from supply chain bottlenecks and emerging cost pressures.
Group revenue for the year to June rose a solid 8.5% to $36.8 billion including a small contribution from the just acquired Australian Pharmaceutical Industries – now called ‘Health’.
But while it has digested a tough 12 months thanks to Covid, Wesfarmers warned Friday that it had a new concern – rising costs – one shared with all other retailers.
The fact that conditions in retailing are changing, with inflation and all the pressures it brings, is now a bigger concern.
While Wesfarmers said the Australian economy was “starting from a strong base with low unemployment and high levels of household savings, the effects of inflation and higher living costs are placing pressure on parts of the economy, including household budgets.”
“The Group continues to actively manage inflation, leveraging its scale and sourcing capabilities to mitigate the impact of cost increases. While general inflation remains elevated, prices for some inputs such as cotton, timber and plastic resins have moderated in recent months.
“The Group’s retail businesses are well positioned as cost-of-living pressures impact household budgets and value once again becomes increasingly important to customers.
“The retail businesses will maintain their focus on meeting the changing needs of customers and delivering even greater value, quality and convenience.”
“Retail trading conditions have remained robust through the first seven weeks of the 2023 financial year, Wesfarmers said.
Wesfarmers said that while earnings at its discount department store chains Kmart and Target were hit by months of Covid disruptions in the year to June, both groups are rebounding and well positioned for the growing cost-of-living crunch.
“Sales growth has been particularly strong in Kmart Group, with sales significantly higher on both a one-year and two-year basis. Bunnings also continues to see positive sales growth, on a one-year and two-year basis. Sales in Officeworks were in line with the prior year.”
Wesfarmers earnings may have dipped by a tad under 3% for the full 2022 year but they still totalled a not insubstantial after-tax figure of $2.35 billion, down from $2.42 billion in 2020-21 – a year that also saw big hits from Covid lockdowns and tough social distancing rules.
After the weak December half of the financial year when net profit fell 14% to $1.213 billion, the second half saw a solid rebound as the Covid shutdowns vanished and earnings rose 13.1%.
Kmart Group, which includes Kmart, Target and online retailer Catch, took a hit in the year from the closures and absenteeism with revenues down 3.5% to $9.6 billion and earnings before interest and tax dropping 35.7% to $505 million.
Kmart’s sales increased by 0.5% for the year overall, while Target’s declined 15.8% – largely because of closures of Target and Target Country stores over the year.
Wesfarmers CEO Rob Scott said conditions at the retailers had improved, however.
“Results for Kmart Group improved significantly in the second half, with Kmart and Target delivering strong second-half earnings growth of 19.4 per cent, benefiting from actions taken in recent years to optimise the store network,” he said.
As inflationary pressures hit household budgets, the business says the stores are well-matched to budget-savvy shoppers.
“Kmart is uniquely positioned in an inflationary environment to extend its low-price leadership and profitably grow its share of customer wallet,” the company said in its report to the ASX on Friday.
Officeworks revenues were up for the year to $13.2 billion, but it suffered a 14.6% drop in earnings 10 $181 million after lockdowns closed stores and took the brand’s high-margin printing centres offline.
“COVID-19 continued to present operational complexity and create increased trading variability during the year,” Wesfarmers said, referring to its home improvement chain Bunnings.
But performance improved at Bunnings – which brings in more than two-thirds of the company’s profit – after a weak first half, with total store sales rising 7.8% in the final six months.
Bunnings lifted sales 5.2% to $17.7 billion and gross earnings edged up 0.7% to $2.3 billion.
The company said the outlook is still strong for Bunnings, though supply chain challenges remained for the retailer.
“The demand outlook across consumer and commercial is supported by a solid pipeline of renovation and building activity, as well as incremental DIY growth opportunities,” Wesfarmers said.
Covid continues to be a problem for large employing companies like Wesfarmers (and Qantas, as we heard on Thursday, as well as Woolworths) with continuing high levels of infection triggering high absentee rates, sick leave claims and difficulties filling job vacancies.
Thanks to the solid second half, directors lifted the final dividend to 41 a share, taking the total for the year to $1.80, up 1.1%, which is well behind the 6.1% inflation rate.
And looking to the coming financial year, the company said it was confident it could adapt to changing circumstances and new pressures.
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Meanwhile, Wesfarmers said it spent $304 million as its share of spending on its 50% owned (with SQM of Chile holding the other half) Mount Holland lithium project in the year to June.
“Progress continues at the Mt Holland lithium mine, with construction of the village and aerodrome completed. Pre-strip mining and construction of the concentrator and Kwinana refinery continue to advance.
“Construction activity at the Mt Holland lithium mine and concentrator and Kwinana refinery continues, and Covalent (the joint venture with SQM) remains focused on actively managing labour constraints in the WA construction industry, and COVID-19 impacts on its workforce and supply chains.
“Lithium market fundamentals remain favourable, underpinned by the growing demand for battery electric vehicles, and negotiations to supply lithium hydroxide to key counterparties are underway.”
