Wesfarmers net profit falls 58.3 per cent

Rob Scott says the deal is in the best interests of Wesfarmers’ shareholders.

Wesfarmers’ net profit after tax fell 58.3 per cent year on year, largely as a result of the disastrous Bunnings UK and Ireland venture, which forced the retailer to take a $1.65 billion loss in fiscal 2018.

Reporting a net profit of $1.19 billion, down from $2.8 billion in the previous corresponding period, the group noted FY18 was a year of significant change.

“Following the decisive actions taken to address underperformance and reposition the Group’s portfolio, Wesfarmers is well placed to deliver sustainable growth in earnings and improved shareholder returns,” the company said in a statement.

Retail earnings increased 5.2 per cent during the year, with Bunnings Australia and New Zealand (BANZ), department stores and Officeworks reporting strong results.

The BANZ result was bolstered by strong store sales growth of 8.9 per cent, with same-store sales up 7.8 per cent, as well as the launch of an e-commerce site, which allows customers to place special orders online and provides a wider choice of products.

The hardware chain posted earnings before interest and tax (EBIT) of $1.5 billion, up from $1.33 billion in FY17.

Coles, which has been dogged by the provision of free reusable plastic bags in recent weeks, reported rising basket sizes and transaction volumes, but failed to turn its earnings growth in the second half into a full-year increase. The supermarket’s EBIT was $1.5 billion in FY18, down from $1.6 billion last year.

Coles Online grew by double digits, while the supermarket’s food and liquor segment recorded sales growth of 2.1 per cent, with comparable sales growth of 1.1 per cent for the year and 1.8 per cent for the fourth quarter.

IBISWorld Senior Industry Analyst Andrew Ledovskikh noted that while Coles’ sales grew, the research firm expected this growth will not be strong enough to outperform industry rival Woolworths.

“The Coles brand has recently come under increased price competition from Woolworths and Aldi, which has weakened sales growth and caused the company’s market share to decline over the past two years,” said Ledovskikh.

“Kaufland’s entry into the Australian market could potentially compound this trend.

“Meanwhile, the Target business continues to struggle to replicate the success of the Kmart department store business.”

The group’s department stores provided a mixed-bag of results, with Kmart sales up 8 per cent, while Target sales dropped 4.7 per cent.

Kmart’s strong sales growth was driven by double-digit growth in customer transactions and units sold. It opened 10 new stores and refurbished 20 during the year, while Target found improved trading margins, lower shrinkage and productivity improvements across stores and supply chain.

Wesfarmers’ underlying EBIT for its department stores grew 21.5 per cent year on year to $660 million, excluding a $306 million impairment on Target’s goodwill, brand name and other fixed assets. The company cited “difficult trading conditions in an increasingly competitive market and a moderated outlook for the business” as the reason for the impairment.

The group’s Officeworks business reported EBIT growth of 8.3 per cent to $156 million, thanks to higher sales in-store and online, gross margin growth and a strong business-to-business customer segment.

Looking forward, Wesfarmers remains generally optimistic and says its market segments are well positioned for the future. It expects the Coles demerger to be completed in November 2018, providing the group greater operational and strategic flexibility.

IBISWorld expects the Supermarkets and Grocery Stores industry to total $102.3 billion in 2017-18, with Woolworths estimated to hold 37 per cent market share, with Coles totalling 30 per cent, Aldi at 9 per cent and smaller players accounting for the balance.

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