Coles Group is trading ex-results and cum-break up, so any reaction in the price of the company’s shares is solely dependent on the latter.
The 15c share rise in the company’s shares to a new all time high of $16.15 was only due to the update on the sales process which will end with the company either being sold off in segments or sold to the highest bidder as a whole unit.
Any basis for a valuation derived from yesterday’s interim earnings or the forward projections and guidance is merely incidental.
The results did surprise on the upside with some brokers, led by Goldman Sachs JB Were, apparently missing the mark.
The firm forecast a fall in earnings to $459 million from the $484 million earned in the first half of the 2006 year. Instead the company reported a 3.5 per cent rise to $501 million.
But the firm’s forecast was before non recurring items and Coles didn’t disappoint, reporting a profit before NRIs of $429 million: so it disappointed again.
In contrast rival Woolworths earned just over $695 million in the first half of the 2007 year.
That was a 28 per cent rise on the previous year and put the company on track to earn around $1.2 billion for the full year while Coles says its still looking at earning ‘ in the order of $787 million” (it’s got a bit less precise).
“We remain on track to deliver earnings in the order of $787 million for the full year but with a lower than anticipated contribution from supermarkets,” Chairman Rick Allert said in a letter to shareholders, released yesterday.
The less than expected contribution was flagged last month when the news broke that the revamp (which involved getting rid of the Bi-Lo brands and rebadging stores as Coles) had stalled, forcing the company to put the sale and or break up idea back on the agenda.
As a result the retailer is working through a range of options, including the potential demerger of its discount retail arm Target and supplies unit Officeworks.
It will also consider the sale of a significant stake in its ‘everyday needs’ business, which includes supermarkets, liquor, Coles Express and Kmart, as well as a full sale of the entire group.
The Chairman said interest so far in the company, which has a market value of about $19.2 billion, had been strong and that the sale process could take up to six months.
“We are very pleased with the level of interest which has been expressed by parties wishing to explore buying the business as a whole, acquiring Target and/or Officeworks, or buying the whole of or a significant stake in the ‘everyday needs’ business,” Mr Allert said.
“The board is also pursuing the potential demerger of Target and Officeworks, and will assess the value of those businesses as separate public companies as part of its evaluation.
“In addition, the board will be considering the potential sale of a significant stake in the `everyday needs’ business, which could result in the business continuing to be listed and shareholders being able to participate in the benefits brought to the business by a new investor.
“In short, we intend to leave no stone unturned in looking at all options that could be in the interests of our shareholders.”
Coles said sales from continuing business rose 2.4 per cent to $17.77 billion but group earnings before interest and tax (EBIT) were flat at $737.5 million, compared to $737.6 million.
That’s the real crime at Coles: in the strongest retailing period of the year with retail conditions buoyant and petrol prices low, Coles management was unable to provide any momentum for the core supermarkets and liquor business.
It takes a special class of incompetence to achieve that result.
Coles CEO John Fletcher said “The headline result is in line with our expectations as we transition the business through its transformation program and commence implementation of the new growth strategy”.’
It was another example of corporate jargon without any sign of an apology or rational explanation for the failure of the revamp such as, ‘sorry, we stuffed up’.
In maintaining that estimate for the full year of after tax profit of ‘around’ $787 million the retailer repeated the earlier warning that the full year result will be impacted by lower sales growth in its food and liquor division in the second half.
It said the 2008 financial year net profit after tax was still expected to be in line with previous guidance, with growth of 20 per cent on the 2007 result expected. That’s down from the original estimate of a 30 per cent increase (about what Woolies achieved in the first half).
The company said the Food and liquor division’s EBIT was up 5.7 per cent to $397.8 million while Target’s EBIT was flat at $188.8 million. (The Food and Liquor EBIT margin to sales didn’t rise during the year from 3.84 per cent while Woolies’ margin is well above 5 per cent.)
Kmart reported a 22 per cent fall in EBIT to $72.5 million while Officeworks EBIT rose 8.8 per cent to $32.1 million.
The Coles Express made EBIT of $61.2 million, up 201.5 per cent and that seems to have been responsible for the overall improvement in earnings.
Chairman Allert said that the company had set some ground rules to ensure a level playing field for potential buyers.
Parties bidding for the Coles Group or the ‘Everyday Needs’ business (that’s supermarkets, liquor and petrol with Kmart) would be limited to a maximum of six equity consortium members per bidding syndicate and a maximum of three exclusive banks or financiers and three non-exclusive banks or financiers in a banking syndicate.
The company said arrangements for engaging legal and accounting advisers must not prevent the advisers working for other interested parties.
Mr Allert said preparations were well underway for due diligence, including a data room that would be made available to selected interested
