Wesfarmers warns interest rate cut not enough to bolster consumer
Wesfarmers CEO Rob Scott warns we are “not out of the woods yet” on the economy as dangers still persist despite this week’s cut in interest rates.
Wesfarmers chief executive Rob Scott has warned that the Australian economy is “not out of the woods yet”, saying he expects cost-of-living pressures and higher business costs to persist despite this week’s cut in interest rates.
Trying to stay one step ahead of these inflationary cost pressures, the conglomerate has lent more heavily on productivity gains at its retail arms Bunnings, Kmart and Officeworks to maximise profit while keeping shelf prices low.
The successful maintenance of its retail division’s arms’ reputation for competitive prices and value helped bolster sales and earnings, driving a better than expected interim profit for Wesfarmers and a healthy hike in its December half dividend.
While Mr Scott did concede that inflation in Australia was moderating from the highs witnessed in the wake of the Covid-19 pandemic, there were still threats to the Australian economy, consumers and businesses. They ranged from geopolitical risks to tariffs, a tight housing market and the weak Australian dollar.
“Economically, I would say we are not out of the woods yet,” Mr Scott said on Thursday as Wesfarmers reported a 2.9 per cent lift in interim profit to $1.467bn.
“Firstly I would repeat the comments that the Reserve Bank governor made that we need to be very mindful of some of the ongoing inflationary pressures that we are seeing. The other points I would add to that would be that the decline in the Australian dollar will have an inflationary impact on a lot of the imported products that come into the country, so that’s yet to flow through,” Mr Scott told The Australian.
“There are also the cost pressures and the supply constraints that we see in the housing sector. It would be great to see some of those supply constraints ease up, and then the final, more cautionary note is just around geopolitics, and it’s impossible to predict exactly what is going to happen on the geopolitical side.
“We should just be mindful of the uncertainty that exists.”
For now Wesfarmers looks to have dodged the worst. Its December-half earnings result was around 2 per cent ahead of market expectations and its profit workhorse Bunnings delivered a 1 per cent beat to profit forecasts.
Wesfarmers group revenue for the December half was up 3.6 per cent to $23.49bn. Across its key divisions earnings rose at Bunnings, up 3.1 per cent to $1.322bn, and at Kmart Group, up 7.2 per cent to $644m. Officeworks earnings were up 1.2 per cent to $87m.
Its struggling online marketplace Catch, which will be closed down, recorded an 18.6 per cent slide in sales to $258m for the half, although losses slightly narrowed to $39m from $41m.
Earnings were better at its WesCEF chemicals arm but earnings fell for its industrial and safety division. At its new Wesfarmers Health arm, earnings rose 3.7 per cent to $28m.
Wesfarmers announced an interim dividend of 95c per share, up from 91c, and payable on April 1.
“Our EBIT growth was a bit stronger than our net profit after tax growth, because of a slight difference in the effective tax rate this year than last year, but we also generated good cashflows,” Mr Scott said.
“We have a policy of getting franking credits back to our shareholders so we felt that slightly higher dividend was the right level and the right reward for shareholders, based on our current performance.”
Mr Scott said the increase in profit in a challenging environment highlighted the strong execution across the group, with the divisions improving their customer propositions and delivering productivity initiatives that drove growth and efficiency.
“During the half, cost of living and cost of doing business pressures continued to significantly impact many households and businesses,” Mr Scott said
“In this environment, the divisions remained focused on long-term shareholder value creation, investing in even greater value, service and convenience for customers. Proactive efficiency and digitisation initiatives helped mitigate higher costs, while enabling divisions to enhance the customer experience.
The conglomerate’s biggest business, in terms of profit contribution, Bunnings, booked a 3.1 per cent rise in sales to $10.263bn, driven by strong consumer sales growth and continued growth in commercial and trade. The hardware chain remained well positioned to continue providing value to cost-conscious customers, Wesfarmers said.
“Bunnings demonstrated the resilience of its offer, with strong consumer sales growth and continued sales growth in the commercial segment,” Mr Scott said.
Kmart Group’s sales for the half rose 2 per cent to $6.2bn. with earnings growth supported by the market-leading value and appeal of its private label Anko product ranges, and productivity initiatives undertaken in recent years, including the integration of Kmart and Target’s systems and processes.
Shares in Wesfarmers ended up $1.02 at $77.62.
Originally published as Wesfarmers warns interest rate cut not enough to bolster consumer
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