Woolworths chief executive Grant O'Brien describes the group's first half profit as a work in progress, and it is. He has a mountain to climb to get Woolies back to its glory days.
Woolies is a very powerful company. It collected revenue of $30 billion in the December half, delivered an underlying return on funds employed of 18.2 per cent, and after offloading retail real estate into its $1.4 billion Shopping Centres Australasia spin-out finished the period geared at only 25 per cent.
It's also still significantly more profitable pound-for-pound than arch-rival Coles - but Coles is catching up, and its O'Brien's job to do something about it. His big bets are laid, and from here on he will see what the payouts are.
Woolies' total return on funds was lower at 15.5 per cent in the December half because the Masters hardware chain that is being rolled out against Wesfarmers' Bunnings hardware chain is still in its establishment phase, and losing money. That's part of O'Brien's work in progress, however. He completed the divestment of Woolies' under-performing consumer electronics chain, Dick Smith, in November, and is now focused on the Masters rollout and on building profit momentum in the group's food and liquor outlets and the Big W discount merchandise chain.
The creation of online channels is a key part of the plan, and Woolies does appear to be getting traction. Its Australian supermarkets lifted online sales by 50 per cent in the half, and the head of the group's liquor business, Brad Banducci, says 50 per cent of online liquor searches now either begin at the 18-month-old Dan Murphy's site or end there: that's an Amazon-like metric.
Capital expenditure is still high as O'Brien invests in growth. It will be about $2.24 billion this financial year, up from $2.05 billion in 2011-2012 and $1.84 billion in 2010-2011.
The group and its US partner Lowe's opened 10 Masters stores in the December half, expect to open at least 5 more in the current half, and have over 115 in the pipeline. O'Brien says the group will update financial guidance on Masters when it next reports, but he says the first batch of stores are on budget, and is not retracting earlier guidance for an $80 million loss by Masters this year, and a move into the black in 2016.
Woolies also opened 38 new supermarkets in 2011-2012 and will open another 34 this year before moving back down to its more normal opening rate of about 25 openings a year in 2014.
As the expansion surge tails off and Masters moves towards profits the dividends from O'Brien's remake will to flow, and to see what they could be, let's look at where Woolies has been.
The group was in a virtuous circle a decade ago as it drove margins higher on the back of supply chain improvements and divided the spoils between shareholders, yet more investment in the business and lower grocery prices. Coles struggled and failed to keep pace, and Woolies' return on funds employed rose from 35 per cent in 2000-2001 to a stonking 49.3 per cent in 2003-2004.
The return on funds fell to 38.7 per cent in 2004-2005, tracked on either side of 30 per cent between then and 2010-2011, and then fell to 24 per cent in the June 2012 year and to 18.2 per cent or 15.5 per cent in the latest half, depending on whether Masters is included.
The latest numbers do reflect that investment in growth, however. And while a 15.1 per cent rise in December-half earnings before interest and tax at Wesfarmers-owned Coles thrashed the 6 per cent EBIT gain Woolies' Australian food, liquor and petrol outlets managed, Coles' return on capital was still only 9.2 per cent. Its return on capital is weighed down by Wesfarmers' "mark to maximum asset value" takeover of the Coles group for $22 billion in 2007, but its EBIT-to-sales profit margin of 4.8 cents is still 2.1 cents below Woolies' supermarket margin of 6.9 per cent.
That's a gap O'Brien is defending. Woolies' 2003-2004 return on funds of almost 50 per cent is an aspirational target that won't be repeated now that Coles is a much stronger competitor, but O'Brien needs to boost returns significantly, and the clock is ticking louder.
It's a small world at the top of the mining industry. Marius Kloppers beat the-then chief financial officer of BHP Billiton, Chris Lynch, to BHP's top job in 2007, and almost immediately head-hunted Andrew Mackenzie from Rio Tinto.
Lynch left BHP after Kloppers took over, and while he ran Transurban between 2008 and 2012, Mackenzie rose to the top of the BHP succession pack. Mackenzie replaces Kloppers as BHP's CEO in May - and after bringing Lynch onto its board as a non-executive director a year and half ago and appointing Sam Walsh to replace Tom Albanese as CEO in January, Rio will now hire Lynch as chief financial officer: he takes over in April from Guy Elliott, who announced his intention to stand down as Rio CFO in July last year.
It's all a bit incestuous, but it's also a good early appointment by the 63 year old Walsh. The 59-year-old Lynch knows mining numbers every which way, and at Transurban he showed his bulldust detector was working by weaning Transurban off debt-funded dividend payments. He will be a key player inside Rio as Walsh moves to ramp up the group's profitability in a transparent way.
The Maiden family owns BHP shares.