Goyder still has room to improve

AMID all the sharemarket exuberance over the strong Wesfarmers result yesterday, the glass-half-full take on the company is that its return on capital is still below long-stated aims.

AMID all the sharemarket exuberance over the strong Wesfarmers result yesterday, the glass-half-full take on the company is that its return on capital is still below long-stated aims.

Chief executive Richard Goyder readily admits he has not met the hurdle since the company acquired Coles five years ago.

From a glass-half-full perspective this adds to the incentive for Goyder to improve on what was an otherwise impressive result delivered yesterday.

It was enough to send the stock soaring to 15-month highs despite the fact that the result was broadly in line with expectations.

While Wesfarmers is a conglomerate that spans several retail brands, resources, insurance, chemicals and fertilisers, the response to the 10.6 per cent increase in group profit was not behind all the excitement. The focus on the company's performance is directly on how the Coles supermarket chain is performing.

In this respect the company has delivered all it promised. It has been an arduous process but Coles is clearly still on a roll increasing profit by an impressive 16.3 per cent. The liquor part of this business continues to be a problem and one that will take time to fix, but the supermarkets are travelling well.

While Coles and most of its individual retail businesses are getting the upside from being in turnaround mode they are also sitting in a sweet spot relative to industrial companies trading on the Australian market. Given the largely poor conditions prevailing in the Australian retail sector, the place a company wants to be is in the non-discretionary segment.

Goyder takes the view that poor consumer sentiment is understandable and rational. It certainly works for his organisation indeed the conglomerate's retail brands are perfectly suited to cautious and value-driven consumers.

While the government, the Reserve Bank and any number of economists are screaming about the fact that we are too busy worrying and misreading all the positive elements to the Australian economy when compared with the rest of the world Goyder says it is an anxious time for those that are watching global economies and see the value of their houses and superannuation falling.

But Wesfarmers' share price is doing its level-best to lift the stockmarket. It has been rising strongly over the past month or so and jumped up $1.23 to $33.72 yesterday in response to a strong group profit.

As with most profit reports, the market is looking to the future and the outlook statements about the current year's potential.

And the good news from Coles is that there are no suggestions growth will ease. There are still some logs left to hollow in this business, even given the stated five-year turnaround phase will be reached at the end of this year.

While the man who has steered the Coles revolution, Ian McLeod, will have his large pay packet clipped when his renewal comes up, the good news is that he is staying for another term. This is what the market wants to hear, but perhaps not what would gladden the ears of arch rival Woolworths.

Coles' strong focus on lowering prices has gained plenty of resonance with supermarket shoppers. Whether or not the facts back it up, there is clearly a perception that Coles is stealing the march in this respect.

Coles is selling the line that lowering prices on everyday items is mainly about cost-efficiencies within the business. It's not politic to talk about the fact that the supermarket chain is paying suppliers less albeit while offering some more volume.

Unlike Woolworths, which is pushing revenue and profit growth through large store rollouts, Coles is spending its capex on enlarging and refurbishing existing stores together with churning sites.

McLeod says the foundations are now in place for a second wave of transformation. Top of the list is renewed investment in value, which translates to even cheaper prices.

How much more juice can be squeezed from suppliers is a contentious issue. Goodman Fielder, one of the largest manufacturers of bread and ingredients, showed when it released its earnings this week the cost of being caught in the war between the supermarket chains and being forced to drop its prices and margins in response.

The other standout performance in retail is the success in the turnaround of Kmart, whose earnings jumped by 32.3 per cent. It got a bit of a kicker in the final quarter from the government's stimulus payments but being in the discount department store cluster is appealing to this market.

Its product range is viewed as cheap and its advertising is pushing this message out to the community.

Kmart has also done a good job of taking costs out of this business by better sourcing and inventory management.

Bunnings under scrutiny by the market since Woolworths opened a competitive chain, Masters again produced a strong result. While earnings growth was a less glamorous 4.9 per cent, it has been firing well for years.

With Wesfarmers' operating cash flow up up almost 25 per cent and plans to trim capex this year, there is ample opportunity for the group to get back into its traditional bargain hunting for acquisitions.

But Goyder seems more focused on improving his existing business than in finding new businesses.

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