Wesfarmers works its magic on Coles

Wesfarmers works its magic on Coles

Wesfarmers has taken its time applying its magic to Coles, but one thing is clear from its recent half-year result: it’s beginning to reap the benefits.

The 2009 December quarter saw same-store sales growth hit 5.9%, beating Woolworths’ 3.8% for the second quarter in a row. That trend has continued in the latest result.

Coles increased earnings before interest and tax (EBIT) by 15% to $755m, on a 4.8% increase in revenue to $18bn. On a like-for-like basis, sales grew 3.8%, reflecting an expansion in food and liquor EBIT margins from 4.4% to 4.8%. All this despite price deflation of 2%.

Of course, the result wasn’t without the usual corporate blather.

The company spoke of “embedding customer loyalty and trust, improving operational productivity through supply chain efficiencies and simpler in-store processes, and the introduction of new and innovative merchandise initiatives”. We’ll translate that as ‘better retailing’.

One of the nice things about investing is that your best performers get bigger while your problems get smaller, and conglomerates see the same effect.


The improvement at Coles means it now accounts for 37% of group EBIT, while a 63% fall in EBIT from the Resources division saw its share of the pie fall from 13% to just 5%.

Bunnings also had a good half with EBIT rising 6.8% to $518m on revenue growth of 6.0% (3.4% like-for-like), while Kmart shot the lights out with a 24.9% rise in EBIT due to ‘continued improvements in sourcing, inventory management and strong performance in [its] everyday and seasonal ranges’.

Yep, better retailing again.

The one blot was Target, where a fall in EBIT margins from 9.0% to 7.1% resulted in a 20.4% drop in EBIT. Target may have been slightly overlooked in the past few years while there have been bigger fish to fry. But with Coles beginning to crackle, management is now on Target’s case.

Elsewhere, insurance had a strong result thanks to higher premiums and lower claims, but coal saw a 63% fall in EBIT to $93m on a 24% fall in revenue, due to lower coal prices. The company doesn’t see much improvement in the short term and the focus continues to be on cutting costs.

Chemicals, energy and fertilisers EBIT rose 5.1% to $104m, while Industrial and Safety EBIT fell 9.3% to $88m due to a ‘general slowdown in business activity, most notably with mining customers’.

Overall, revenue rose 3.2% to $30.6bn, EBIT increased 5.5% to $2.0bn and net profit jumped 9.3% to $1.3bn. Earnings per share rose 9.2% to $1.11 and an interim dividend of 77 cents was declared (up 10%, fully franked and payable on 28 March).

Net debt at 31 December stood at $4.5bn, giving a net debt-to-equity ratio of 17%, and the interest bill in the half was covered nine times by EBIT. No need for concern there.

Overall, it’s an excellent set of results and reflects Wesfarmers’ patient and consistent application of good business principles, a bit of a rarity in corporate Australia.

We’ll have to wait and see what comes of the ACCC’s investigation into Woolies’ and Coles’. But while the supermarkets might be unpopular for their perceived treatment of suppliers, anything the ACCC did that had the effect of raising prices would be even more so.

The value in Wesfarmers is increasing and, although the shares remain fairly priced, any temporary slip should be treated as a potential buying opportunity.

This article contains general investment advice only (under AFSL 282288).

Nathan Bell is research director at Intelligent Investor Share Advisor. BusinessDay readers can enjoy a free trial offer and fortnightly podcast. For more Intelligent Investor articles click here.

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