Wesfarmers profit plunges 58 pc after UK hardware exit, Target write-down

Wesfarmers managing director Rob Scott is counting on his largely new leadership team to deliver earnings growth in 2019 as the conglomerate spins off its most defensive business amid growing headwinds in the housing market and increasing retail competition.

After a year of change in 2018, when Wesfarmers sold its coal assets and called it quits on a disastrous $1.7 billion foray into the UK hardware market, Wesfarmers is facing even more upheaval in 2019 with the $20 billion demerger of Coles, which will increase its exposure to the home improvement market through Bunnings and to discretionary spending at Kmart, Target and Officeworks.

Analysts and investors have questioned whether the strong earnings growth delivered by Bunnings, the department stores and Officeworks in 2018 is sustainable, particularly after a raft of leadership changes.

“They’re cycling some difficult numbers and the external environment is getting more difficult rather than easier,” said JP Morgan analyst Shaun Cousins.

Bunnings was once again a star performer in  Wesfarmers' stable, although sales momentum is expected to slow this year.
Bunnings was once again a star performer in Wesfarmers’ stable, although sales momentum is expected to slow this year.

Karleen Minney

Guy Russo, the well-regarded department stores chief executive, is retiring in November, Coles managing director John Durkan steps down in September and Wesfarmers is still searching for a replacement for long-serving Officeworks boss Mark Ward, who retires in December. Bunnings boss Mike Schneider, industrials managing director David Baxby and chief financial officer Anthony Gianotti  have been in their roles for about a year.

Advertisement

“You’ve got a lot of new people in new roles and I don’t know how they will go with a more difficult external environment and under the spotlight of senior roles in a listed company,” said one analyst, who declined to be named. “No Bunnings executive has seen a downturn or a recession.”

However, Mr Scott is upbeat about the company’s prospects and says Wesfarmers has the right balance of long serving executives and ‘new blood’ as it pursues growth in its existing businesses, builds its digital and data capabilities and explores external opportunities, including possible offshore expansion.

“It’s important to have a degree of renewal in the leadership team and that’s what we’re going through at the moment,” Mr Scott said.

Mr Scott is also optimistic about the economy – “we’re seeing reasonably strong economic growth and retail spending is fairly solid” – and believes falling house prices are an opportunity rather than a threat, making home ownership more accessible.

“We feel optimistic about the outlook for consumer spending,” he said.

Wesfarmers’  bottom-line profit plunged 58.3 per cent to $1.19 billion after the conglomerate booked $1.4 billion in losses and write-downs from discontinued operations including its short lived foray into the UK hardware market and wrote down the value of Target by $300 million.

However, excluding impairment charges and one-off items, underlying net profit from continuing operations rose 5.2 per cent to $2.9 billion, beating consensus forecasts and sending Wesfarmers shares up 3 per cent to a record $52.20.

Underlying earnings before interest and tax from continuing operations rose 4.5 per cent to $4.37 billion – compared with consensus forecasts of $4.23 billion –  with Bunnings’ earnings rising 12.7 per cent to $1.5 billion, Officeworks up 8.3 per cent to $156 million and industrials up 13.1 per cent to $680 million.

Coles’ EBIT fell 6.8 per cent to $1.5 billion for the year as a 14 per cent fall in first-half earnings offset a 3 per cent improvement in the June-half. Department store profits jumped 21.5 per cent to $660 million, with both Kmart and Target delivering earnings growth despite weaker sales at Target.

Wesfarmers kept its final dividend steady at $1.20, taking the full-year payout to $2.23, in line with that in 2017.

However, Mr Scott indicated Wesfarmers would return surplus capital to shareholders through franked dividends or a share buy-back once the demerger of Coles had been completed and proceeds from the sale of the Bengalla coal mine for $860 million and the sale of Kmart Tyre & Auto for $350 million were received.

“If we end up with cash that’s surplus to our requirements, and noting we do see more opportunities to invest in our core businesses, if we have surplus cash we won’t hesitate to give that back to shareholders in the most tax efficient way,” he said

Mr Scott said sales growth was expected to moderate at Bunnings. ​Same-store sales growth at Bunnings slowed in the June quarter to 4.9 per cent, well below market forecasts around 7.3 per cent and compared with 7.7 per cent in the March quarter, taking growth for the year to 7.8 per cent.

However, Bunnings was cycling very strong same-store sales growth of 10.4 per cent in the June-quarter 2017 and on a two year basis sales momentum remained strong.

Sales momentum in Coles supermarkets improved through 2018 and continued to build into the first quarter of 2019, he said, underpinned by Coles’ ‘Little Shop’ collectibles promotion.

“We feel more optimistic about the momentum within Coles than we did six months ago,” he said.

Kmart and Target were unlikely to repeat their stunning performance in 2018, he said, but the group was otherwise well placed to deliver sustainable earnings growth and the conglomerate model would continue to serve it in good stead.

“The three key priorities for the year were to address areas of underperformance, reposition the portfolio and drive opportunities for growth, with good progress made against each of these,” Mr Scott said.

“The proposed demerger of Coles, and the divestments of Curragh and BUKI during the year, demonstrate a disciplined approach to capital allocation and portfolio management, and will reposition Wesfarmers for the next decade.”

Read More

LEAVE A REPLY

Please enter your comment!
Please enter your name here