Wesfarmers Readies Coles Demerger

By Glenn Dyer | More Articles by Glenn Dyer

Analysts are expecting Coles to reveal a solid rebound when it reports on its first-quarter sales a week today.

The September quarter figures will be notable because they will be the last sales release before the demerger from Wesfarmers in November – December.

The boost in same-store sales growth to around 4% to 5% from 1.8% will be thanks in part to its recent Little Shop toy giveaway and its decision to continue giving away free plastic bags after Woolworths removed them.

While Woolworths has outperformed Coles on the key retail metric of same-store sales growth for the past seven quarters, a turnaround from Coles is expected for the first quarter of 2018-19 and perhaps lingering into the December quarter and Christmas.

Coles will report its first stand-alone financial report next February, along with that of its former parent and 15% shareholder, Wesfarmers.

Wesfarmers said on Friday that its report will contain five months of contribution from Coles whose report will be a proforma in some respects, but the vital sales and the data will be enough to give investors a starting base for the company’s life alone after more than 11 years as part of Wesfarmers.

Friday saw Wesfarmers release the hundreds of pages of documentation for after it was given the go-ahead by the Supreme Court of Western Australia to proceed with the Coles spin-off.

The documents revealed that Coles new managing director Steven Cain will be paid a $3.9 million sign-on bonus – in addition to his base salary of $2.1 million and up to $3.5 million in other bonuses – in recognition of payments he lost when he jumped ship from Metcash.

Mr. Cain started work last month and said in Friday’s documents that Coles will continue to move to an “everyday low price” strategy over a discount-driven one, and saw growth opportunities in the convenience sector while tailoring the range in each store to the local community it served.

That included a new store format called “Coles Local”, which would fill gaps in its network in inner-city locations and provide healthy eating options to time-poor shoppers. The first will open in Melbourne’s Surrey Hills “in the coming months”.

Coles bought five Super Barn outlets a couple of years ago in Sydney and Canberra – these are more local than district-sized supermarkets.

“Our team aims to reinvent our in-store experience. This tailoring will be considering ethnicity, incomes and other significant drivers,” Mr. Cain said on Friday in a statement.

As well Coles also confirmed early reports that it will book provisions of between $130 million and $150 million in 2019 relating to redundancies and lease exit costs as it closes five existing distribution centers and moved to the two new, high-tech warehouses.

Coles has reached an agreement for German group Witron to build the automated dry goods distribution centers over five years, which it says will lower costs, improve on-shelf product availability and allow for supply chain capacity growth.

“These investments are ultimately investments that deliver improved sales and improved returns,” Wesfarmers CEO Rob Scott said in the statement issued on Friday. “We’ve been considering this opportunity for the last five years or so, there’s been an enormous amount of work that’s gone into it.”

Woolworths is considered to be more advanced on the road to automation and has spent $350 million on a new robotic distribution center in Melbourne’s outer east that will open early next year.

Coles did not reveal how much its new warehouses will cost but said they would fit into its capital expenditure guidance of between $600 million and $800 million in 2019.

Wesfarmers shares will vote on November 15 whether to approve the $20 billion demerger of its supermarket chain.

If approved, Coles will begin trading on the Australian Securities Exchange on November 21.

The documents also revealed that:

    • Coles will begin as a new company with $2 billion in debt. As well the documentation revealed that:
    • there will be approximately $148 million (pre-tax) in one-off transaction costs associated with the Demerger;
    • Coles will incur one-off separation costs of approximately $25 million;
    • net additional corporate and operating costs for Coles. It is estimated that its net additional annual, pro forma, corporate and operating costs of approximately $28 million will be incurred as a result of Coles operating as a standalone business following the Demerger, excluding operating costs transferred from Wesfarmers;
Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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