Wesfarmers (WES) will pay a higher interim dividend after lifting profit 8.3% to $1.376 billion on a modest rise in sales for the six months to December 31 – a result which hid some quite strong results in most of its retail chains.
The profit – after deducting the insurance businessessold in late 2013 and early 2014 – was driven by solid results from Coles supermarkets and very strong earnings growth from Bunnings hardware, Kmart department stores and the Officeworks chain.
Adjusted revenue rose 0.4% to $31.97 billion.
Despite the overall solid tone to the result, investors decided it could have been better and the shares slid more than 1.5% to $45.18.
Adding to the selling pressure was profit taking by investors who had driven the shares up more than 10% since late last year to more than $45.
Not even the modest rise in interim payment to 89c from 85c, could entice some shareholders to remain in the stock yesterday.
Wesfarmers said statutory profit dipped 3.7% to $1.376 billion (matching market forecasts) because of the absence of the insurance operations sold in 2013. Group earnings before interest and tax rose by just on 6% to $2.1 billion.
“As the domestic economy transitions from a period of reliance on high levels of resource investment, the group is generally optimistic in its outlook,” chief executive Richard Goyder said in a statement with the profit report.
"The group’s portfolio of retail businesses positioned well in an environment where, notwithstanding low interest rates and recent declines in fuel prices, consumers continue to manage house hold budgets carefully.
"Wesfarmers will continue to actively develop and manage its portfolio of businesses, maintaining a strong balance sheet in order to take advantage of opportunities, should they arise, to support the delivery of satisfactory long-term returns.
"Despite variability in the domestic economy and volatility in global markets, the Group delivered a pleasing increase in underlying earnings in the half which demonstrated the benefits of its conglomerate structure.
"Continued strong performances in the group’s retail portfolio supported good growth in retail earnings. The trading momentum of our retail businesses improved through the half, culminating in a strong performance in the important Christmas period," Mr Goyder said.
“Lower earnings were recorded from the group’s industrial businesses, where lower commodity prices resulted in challenging trading conditions,” Mr Goyder said. In fact earnings from resources plunged 40% to $35 million in the half year.
"Coles supermarkets saw a 7.1% rise in year-on-year earnings before interest and tax for the first half, to $895 million, with food and liquor sales rising 5.3% to $15.56 billion. In the December quarter, food and liquor sales increased by 4.9% to $8.5 billion, with same-store sales up a very solid 4%.
"Food and liquor price deflation was 0.7 per cent for the first half and 0.9 per cent in the second quarter," Wesfarmers said. "Ongoing improvements in productivity and operational efficiencies funded greater investment in lower selling prices, driving increased customer transactions, volume, average basket size and sales density,” Mr Goyder said.
Revenue at Coles Express fell by 6% year on year to $3.9 billion, due to falling fuel volumes and an undertaking to the Australian Competition and Consumer Commission that it would limit discounts on fuel linked to supermarket purchases to 4c a litre.
The company’s hardware chain Bunnings reported a 10% lift in first-half earnings before interest and tax to $618 million, as same-store sales increased by 9.1%.
If Bunnings keeps growing earnings like that, it will be Wesfarmer’s most profitable business by the end of this decade.
Kmart’s earnings grew 11.2% to $289 million for the period on sales growth of 5.3%. Sales in the second quarter rose 7% on a topline basis and a solid 3.4% on a same store basis, refuting industry claims of a weak Christmas period. Total revenue rose to $2.4 billion for the half.
The other department store chain, Target, again disappointed. Target reported earnings of $70 million were in line with the prior year, while sales fell 1.8% lower. Revenue fell 1.5% to $1.9 billion. Comparable store sales again fell 1%.
It was a different story at Officeworks where earnings of $50 million were 19% higher for the period, with sales growth for the half of 7.7% recorded (7.5% in the second quarter).
But earnings for the Chemicals, Energy and Fertilisers division fell 13.6% to $95 million.
Comment: Time to break up the conglomerate. The retail businesses are doing well, but the other, older Wesfarmers’ legacy assets are lagging behind. Sell them off and change the name to Coles.
