Wesfarmers shares plunge, Coles hurt in supermarket war
Wesfarmers shares sank nearly 6pc yesterday as flagship Coles posted its worst growth in grocery sales since 2009.
Wesfarmers shares sank nearly 6 per cent yesterday as its flagship retail business Coles faced a renewed supermarket battle with Woolworths and increased competition from Aldi to post its worst growth in grocery sales since 2009.
Even hardware juggernaut Bunnings, one of the most profitable retail operations in Australia in the last two decades, had some of its gloss removed by market forces as the $500 million fire sale by doomed rival Masters disrupted sales.
Bunnings was also hit by wet, windy and cold conditions across much of Australia and softer building activity that pinched hardware and gardening sales.
And while Kmart continued to overshoot expectations with like-for-like sales rocketing 8.2 per cent in the first quarter, managing director Guy Russo was forced to hose down hopes of an early turnaround at problem child Target, whose sales fell in a massive hole, diving 21.9 per cent.
The damage was done to the struggling merchandise chain after Target’s popular annual toy sale was scrapped, costing $75m in sales.
Some analysts fear Target’s radically shrinking sales base will delay any turnaround prospect.
For investors, though, the biggest headache now is Coles, the nation’s second-biggest supermarket chain which, after nearly 10 years of robust quarterly sales growth and seven straight years of trouncing Woolworths in same store sales growth, has seen its lead scaled back and its sales trajectory almost cut in half.
Wesfarmers’ quarterly sales update yesterday reflected the white-hot competition in the $90 billion supermarket sector as Coles generated same-store sales growth of 1.7 per cent against analyst expectations of 3 per cent. It was almost half the 2.8 per cent growth posted in the final quarter of 2016 and down from 3.6 per cent for the first quarter last year.
Headline food and liquor sales were $7.9bn, up 2.9 per cent, with Coles’ underperforming liquor arm achieving its fourth consecutive quarter of growth as its business is restructured to take on market leader Dan Murphy’s.
Shares in Wesfarmers plunged 6 per cent to a low of $41.38 as investors questioned whether Coles’ glory days of trouncing Woolworths were over and the supermarket wars were about to enter a new era with Woolworths in the ascendancy.
The stock closed down $2.51, or 5.7 per cent, at $41.45 — the conglomerate’s biggest one-day fall in seven years.
Coles boss John Durkan, who is responsible for 60 per cent of Wesfarmers annual sales and half its pre-tax earnings, said the supermarket group was continuing to outgrow the market but a slowdown was to be expected.
“Undoubtedly the market has slowed down and we have certainly seen some intensified competition — we knew that was going to come,” Mr Durkan said.
But he killed off any suggestion Coles would change strategy as Woolworths breathes down its neck.
“The upside on the results is that our headline growth certainly remains ahead of market growth and that’s where we position the business. We’ll continue to invest in pricing, quality, service and availability in our stores — we’re not about to change that,” Mr Durkan said.
“We’re in for the long run and we’re not going to be distracted by short-term variances in other people’s strategies.”
Alphinity Investment Management portfolio manager Bruce Smith said Woolworths quarterly sales update, to be released tomorrow, should shed more light on the challenges facing Coles and the competitive tension within the supermarket sector. “I guess we’ll know on Friday if it’s Woolworths coming back but until then I’d say it’s more likely a combination of a slowing market, Aldi opening in South Australia and WA and ongoing deflation that means sales volumes need to increase even more to get sales growth,’’ he said.
“It feels a bit early to give Woolworths too much credit for Woolies supermarkets coming back.’’
JPMorgan analyst Shaun Cousins said Coles’ weak like- for-like sales were due to a slowing in the market and increased competitive intensity. “Wesfarmers indicated slower market growth and increased competitive activity. While market growth has slowed as well, the question exists whether Coles is slowing in its rate of market share growth.”
Sales at Target for the quarter were $643m, down 17.1 per cent, as comparable store sales, which did not have the benefit of the scrapped toy sale, fell 21.9 per cent.
Currently in the midst of a transformation to an “every day low price model” under the guidance of Mr Russo, the merchandise chain was also bruised by the slow start to summer seasonal sales.
Mr Russo said he was disappointed with the first- quarter sales slump, but was holding out hope of the business improving in the run-up to Christmas and in the new year. “I have to get Target into the right space, reset its base and make sure that we own this middle space of being a quality fashion retailer with prices that are lower than my competitors, which they currently aren’t.”
Bunnings’ slowing sales were below expectations, with JPMorgan expecting the discounting triggered by the Masters fire sale would reduce like-for-like sales growth for the market leader to 6.5 per cent (not the 5.5 per cent it recorded) with extended cooler and wetter weather weighing on trading.
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