Coles' sales bounce back but earnings under pressure ahead of spin-off
Coles has posted its best sales results in almost two years but has warned that higher staff costs could put further pressure on its earnings as the supermarket chain prepares to be spun off as a stand-alone company.
The supermarkets’ conglomerate owner Wesfarmers revealed better than expected underlying earnings on Wednesday, thanks to growth at Bunnings and Kmart, sending its share price surging to an all-time high.
The stock's 4 per cent jump came despite Wesfarmers' full-year net profit plunging 57 per cent, thanks to its disastrous attempt to expand Bunnings into the UK and Ireland.
At Coles, its largest business, comparable food sales grew 1.8 per cent in the three months to July 30, which is its best result since the first quarter of financial 2017 and follows six quarters of being trounced by rival Woolworths.
Coles said comparable food and liquor sales for the full 2018 year increased 1.1 per cent, up from 1 per cent growth in the prior year, while total revenue was up 1.6 per cent, driven by more sale transactions and bigger basket sizes.
But busier checkouts did not translate to higher profitability, as the company rolled over customer service improvements, shelf prices fell 1.2 per cent, and sales at its Coles Express services stations fell 6 per cent.
Coles’ earnings before interest, tax and depreciation fell 6.8 per cent to $1.5 billion, after falling 14 per cent in the December half and improving 3 per cent in the June half.
Wesfarmers said sales momentum had continued to build into the first quarter of 2019, driven by the popular Little Shop toy giveaway, but that earnings pressure would not abate.
“The underlying supermarkets business is expected to continue to improve, but earnings will be impacted by the annualisation of additional team member costs,” said the company, which introduced a new wage deal at Coles this year that includes higher penalty rates.
“These additional costs are expected to be largely offset by cost efficiency benefits.”
Wesfarmers intends to demerge Coles, its largest business, later this year after deciding the $20 billion supermarket’s earnings were not growing fast enough.
Underlining that on Wednesday were standout results from its two star businesses, Bunnings and Kmart.
Bunnings’ comparable sales jumped 7.8 per cent, total sales were up 8.9 per cent, and its earnings grew 12.7 per cent to $1.5 billion.
Kmart’s grew comparable sales by 5.4 per cent and total sales by 8 per cent. Earnings from the department store division - which includes Target - jumped 21 per cent to $660 million.
Wesfarmers said its full-year profit fell almost 57 per cent - from from $2.77 billion last year to $1.19 billion - largely due to its Bunnings UK and Ireland (BUKI) business.
Share price at all-time high
Wesfarmers abandoned BUKI in May, after burning more than $1.7 billion on the foray, and also sold its remaining stake in the Curragh coal mine during the financial year.
Removing these discontinued operations and a $306 million write-down at Target from the result, net profit was $2.9 billion - up 5.2 per cent from last year, and beating the market's expectation by about $120 million.
Wesfarmers shares were up 3.8 per cent to $52.51 by 10.45am - the highest they have ever traded.
Managing director Rob Scott, handing down his first full-year result, said 2018 had been a year of significant change with the group repositioning its portfolio of businesses to deliver higher shareholder returns.
"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 [Bunnings UK and Ireland] during the year, demonstrate a disciplined approach to capital allocation and portfolio management, and will reposition Wesfarmers for the next decade."