Wesfarmers savaged as coal, Target weigh on profits

Wesfarmers yesterday delivered its worst result in 14 years as it juggles operational headaches.

Richard Goyder announces Wesfarmers’ profit result in Perth yesterday.

Wesfarmers’ status as one of Australia’s premier blue-chip stocks was hurt yesterday after the Perth-based conglomerate delivered its worst result in 14 years as it juggles operational headaches across its resources, retail and industrial arms.

In a result marred by $2.2 billion worth of savage writedowns across Target and its coalmining arm, the conglomerate unveiled an 83 per cent slump in its annual profit to $407 million.

A slowdown in earnings over the second half at its biggest and most important asset, supermarket chain Coles, has added to the tasks now piling up on chief executive Richard Goyder’s desk, as the super profits pumped out of Bunnings were not enough to counter the pullback in supermarket margins and profitability and heavy writedowns.

In a stark and painful reminder to investors that Wesfarmers was more than just an owner of retailers such as Coles, Bunnings and Kmart, the company’s resources division hurt group profitability as collapsing coal prices triggered a $310m operating loss for that division and also contributed to a $850m non-cash impairment in the carrying value of its Curragh mine. And there were further troubles within its sprawling retail empire to add to its mining woes, as Target, still in the midst of a costly transition under new boss Guy Russo, posted a loss of $195m and threw another $1.266bn in impairments on the pile.

The bottom-line result for Wesfarmers was its smallest profit since 2002, although excluding the impairments net profit for the full year was down only 3.6 per cent to $2.353bn.

Full-year revenue rose 5.7 per cent to $66bn.

Mr Goyder told The Australian he still saw great value in Wesfarmers’ conglomerate model, despite resources, fertilisers and industrial services businesses spilling red ink over its accounts. Coles’s performance remained attractive given the highly competitive trading environment and food and grocery price deflation.

“I think again these results underlie the value of often being a conglomerate, a strong performance from Bunnings, Kmart, and Officeworks, and in an environment with deflation we have had in Coles I feel I can say the Coles results are a strong result as well for the year,’’ Mr Goyder said.

“Coles is a great cash generating business, we think obviously there are material opportunities to improve (Wesfarmers) through improving performances at Target, resources, industrials and safety, and the way we run the company is that we have good cash generating assets and I think they give us plenty of scope to do interesting things in the future.’’ The full-year result, which was slightly short of market forecasts, was compounded by a cut to the final dividend and sent shares in Wesfarmers down more than 3 per cent before it closed down 95c, or 2.2 per cent, at $42.63.

The final dividend was snipped to 95c per share, down from $1.11 for the same time last year, bringing the total payout to shareholders to $1.86, a reduction of 7 per cent on 2015. The final dividend for 2016 will be paid on October 5.

Mr Goyder did not provide guidance for 2017 but commented that competition in the retail sector — which now accounts for more than 97 per cent of Wesfarmers pre-tax earnings — was expected to remain robust with shoppers continuing to be driven by the search for value at a time when the global economy was volatile.

“I think there is a degree of volatility around at the moment, obviously globally there is a lot of things going on and to come in the coming months … that brings with it a degree of cautiousness.

“We obviously have got record low interest rates here, I don’t think we will see that translate into a massive uptick in consumer spending.

“I think consumer are watchful, they are still concerned primarily I think about unemployment and maintaining strong employment in this country is really important.”

It was left to Wesfarmers’ powerhouse retail arms, Bunnings and Coles, and to a smaller extent Officeworks and Kmart, to power earnings against that economic backdrop, and excluding problem child Target, the conglomerate’s retail portfolio delivered growth in earnings before interest and tax of 7.5 per cent.

Coles’s supermarket business earnings increased 4.3 per cent to $1.86bn for the full year, with revenue growth of 2.7 per cent. Bunnings posted an 11.6 per cent lift in earnings to $1.214bn on revenue growth of 21.4 per cent.