Wesfarmers interim profit slips and cuts dividend amid Covid disruptions
It was Bunnings — for more than two decades the most successful retailer in Australia — that emerged as the biggest drag on Wesfarmers’ profit.
Wesfarmers has emerged as one of the biggest casualties of the reporting season after investors savaged the conglomerate for a weaker profit result — bruised by an earnings retreat from Bunnings, collapsed profitability at its Kmart division and mounting costs flowing from the worsening pandemic.
Shares in Wesfarmers plummeted more than 7 per cent, stripping $4.65bn from the Perth-based company’s market capitalisation on Thursday, as it revealed its profit margins had been shaved by the costs of dealing with Covid-19 and it was beset with disrupted supply chains, stock shortages and a spike in staff absenteeism.
Across the retail components of the Perth-based conglomerate it was a mix of thinner margins, bloated inventories and disappearing profits with some businesses such as stalwart Officeworks suffering an uncharacteristic earnings drop of 18 per cent. Elsewhere there was carnage at its online site Catch, which saw a near-200 per cent blow out in its first-half losses to $44m in the red, heightening investor concern if the business bought for $230m in 2019 will ever turn a profit.
But it was Bunnings, which for more than two decades has proved its worth as the most successful retailer in Australia, that emerged as the biggest drag on Wesfarmers’ profit.
It couldn’t escape the cost of forced store closures and cycling a boom in activity through the first waves of Covid-19 in 2021 and it posted its first fall in pre-tax profits in more than 14 years.
It was left to its valuable, although somewhat boring, businesses WesCEF chemicals and its industrial and safety arm to come to the rescue with the divisions the only parts of the conglomerate to post profit gains for the December half.
The bottom line for Wesfarmers and its investors was a 12.7 per cent slide in its interim profit to $1.213bn accompanied by a 9 per cent cut to its dividend as it encountered what chief executive Rob Scott described on Thursday as the most disrupted period for the conglomerate’s businesses since the onset of Covid-19.
Revenue fell 0.1 per cent to $17.758bn and operating cash flows of $1.556bn were 29.8 per cent below the prior corresponding period, driven by lower earnings for the half and the payment of team member incentives relating to the 2021 financial year.
Kmart Group, which includes Target and Catch, was especially punished by higher costs, store closures and booming online traffic — which added to its cost base — to see its profit margins slump by almost two thirds. Bunnings too suffered a margin fall as did Officeworks as back to school sales — its version of Christmas — was ruined by the omicron outbreak and uncertainty over school reopenings.
Wesfarmers shares fell $4.11, or 7.48 per cent, to $50.81 — an eleven month low. The interim dividend was snipped too, to 80c per share, down from 88c previously, and payable on March 30.
High profile analyst David Errington from Bank of America went as far as to argue in an analyst briefing accompanying the Wesfarmers results that he was concerned about the performance under Covid-9 pressure of key assets Kmart, Target and Officeworks.
“Clearly they have not been able to adjust to changing conditions … and that’s a worry as an investor . and as a shareholder or investor that is a red flag on those two businesses. It does worry me,” Mr Errington told Wesfarmers chief executive Mr Scott.
Mr Scott, who will soon shift his office to the east coast as he flees the onerous and smothering Covid-19 border rules in Western Australia, was forced on the defensive for the first time since as the new CEO four years ago he decided to write off billions from its failed launch of Bunnings in Britain and close down the disastrous offshore hardware chain.
Mr Scott on Thursday defended the performance of the conglomerate for the first half, commenting it was the most challenging time for Wesfarmers since the pandemic began in 2019 with around 34,000 trading days impacted by forced government closures of its retail stores — dulling the performance of its typically thriving bricks and mortar sites.
While the company was also unprepared for a 300 per cent spike in online sales volumes to more than 5 million a month that stretched its resources and capabilities as well as fed into higher costs as it scrambled to keep up the pace in terms of staff and logistics to meet insatiable consumer demand.
It also spent $37m on wages for staff on paid pandemic leave and another $43m linked to additional cleaning, security and protective equipment.
“So in that context, I think that the group result was quite remarkable in that context, but we are seeing things improve and omicron has been challenging, certainly around workforce availability, and it did slow down some of the bounce back we saw in the lead up to Christmas,” Mr Scott said.
“And in recent weeks we‘ve seen (Covid-19) case numbers decrease, fewer people in isolation and a real sense of optimism and confidence returning in most parts of Australia.”
At its key workhorse Bunnings, revenue rose 1.7 per cent to $9.209bn in the half. Earnings fell 1.3 per cent to $1.315bn. If property earnings from Bunnings were excluded, earnings for the chain were actually down 4.3 per cent.
Kmart Group’s sales slid 9.6 per cent to $4.917bn as earnings fell 63.4 per cent below the prior corresponding period $178m. Kmart and Target’s trading performance in the first half was significantly impacted by Covid-19 restrictions, with almost 25 per cent of store trading days lost due to government-mandated store closures.
Revenue for Officeworks increased 3.7 per cent for the half to $1.58bn, while earnings declined 18 per cent to $82m.
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