Coles posts ‘solid’ maiden profit result

Supermarket giant Coles says a lower net profit of $738m following the Wesfarmers spin off comes in “challenging” times.

Coles says the result ‘lays the foundations’ for long-term growth. Pic: AAP

Supermarket giant Coles Group has reported a net profit of $738 million in its maiden result following its demerger from conglomerate Wesfarmers, in the largest Australian corporate spin off on record.

Coles, Australia’s second-largest supermarket chain by market share, said the result was 14 per cent below year-ago levels, largely reflecting lower earnings from its convenience store business and costs tied to the spin-off.

Still, Coles said sales in its supermarkets rose by 2.6 per cent in the half despite intensifying headwinds to spending, as households grapple with slack wages growth and a fading wealth effect caused by falling house prices.

Directors didn’t declare a dividend, but said Wesfarmers has indicated its interim payout will partly reflect Coles’s earnings through November 27.

Coles became an independent company at a time of increased competition in the Australian supermarket industry, where hefty margins had previously boosted profits of incumbents.

Coles and Woolworths still have some 60 per cent of the market combined, but German discount chain Aldi has captured 12 per cent in recent years, according to research firm Roy Morgan. Online players like Amazon.com could also enter the grocery market eventually.

The company plans to spend $950 million on two new distribution centres to help it fend off those competitive threats, while analysts have lauded its recent success with marketing promotions such as Little Shop where shoppers could collect miniature versions of grocery items.

But a previously-announced $146 million restructuring provision is weighing on the balance sheet as Coles prepares to moderniseits distribution network as a stand-alone retailer.

Coles’ convenience store segment also dragged profit lower thanks to a 15.8 per cent decline in fuel volumes and unfavourableweather.

Coles chief executive Steven Cain said the first-half result “was a solid outcome in a challenging retail environment,” with Coles laying the foundations for long-term growth.

“We have delivered strong cash generation and we have a robust balance sheet which will enable us to reposition the businessin the years ahead,” he said.

Half-year liquor sales were flat at $1.68 billion, with New Year’s Eve excluded from the reporting period, while Coles Express sales fell 2.5 per cent to $2.8 billion.

Earlier this month Coles signed a new $137 million deal with petrol partner Viva Energy, effectively removing the underperforming segment from the balance sheet, which means it will not set fuel prices and will instead receive a commission on fuel sales.

Coles also reported $357 million of its interim profit is attributable to the Kmart, Target and Officeworks businesses, up until the date they were transferred to Wesfarmers.

Coles yesterday it would not follow rival Woolworths and instead keep its $1-a-litre milk range, citing cost of living pressures for customers.

Dow Jones Newswires, AAP