Supermarkets remain the powerhouse
Wesfarmers can't do anything about coal prices, though, and the two bad results were counterbalanced by three very good ones, and a $579 million capital return sweetener.
Coles supermarket chain boss Ian McLeod turned 5.2 sales growth into a 13.1 per cent rise in EBIT to $1.5 billion, boosting the chain's return on capital from 8.7 per cent to 9.5 per cent in the process.
Under McLeod's leadership Coles' return on capital has risen by 4.4 percentage points in the past five years. It has lifted EBIT by $750 million and expanded its EBIT-to-sales margin by 1.9 percentage points, to 4.9 per cent. It is now only about a percentage point short of covering its cost of capital for the first time since it was acquired along with Target, Kmart and Officeworks in Wesfarmers' $18 billion takeover of Coles Group late in 2007.
Bunnings boss John Gillam meanwhile continues successfully to meet the hardware market attack by Coles and its Masters chain. Bunnings boosted EBIT by 7.5 per cent to $904 million on 7 per cent higher sales of $7.66 billion during the year. Its retail league table-topping EBIT-to-sales margin of 11.7 per cent will probably fall a bit this year as Gillam accelerates store openings to meet the Masters invasion, but he's got room to move after holding the chain's return on capital employed at an impressive 25.9 per cent in 2012-13.
Kmart managing director Guy Russo would also have earned KPI points after posting a 28.4 per cent jump in EBIT to $344 million. The discount chain's EBIT margin rose from 6.6 per cent to 8.3 per cent, thrashing a 5.3 per cent margin reported in the December half by its biggest competitor, Woolworths' Big W chain, and its return on capital jumped from 18.9 per cent to a very solid 25.9 per cent
Kmart has posted double-digit EBIT increases for four successive years under Russo's leadership. When Wesfarmers launched the Coles takeover, it wasn't sure it would keep Kmart. The returns Russo is achieving make it a definite keeper.
But Coles' EBIT is more than 4½ times bigger than Kmart's, so it is McLeod's renovation of the Coles supermarket franchise that is having the most impact.
Wesfarmers bought Coles, Officeworks, Kmart and Target just as the global crisis was expanding, and there was widespread scepticism about its ability to invest heavily enough to renovate the tired supermarket chain.
McLeod built his career with the ASDA supermarket group in Britain and took over at Coles in May 2008. Within a year he had begun to demonstrate that the change Wesfarmers boss Richard Goyder wanted was possible, on the budget that Goyder was setting.
On Thursday Goyder agreed with analysts that a lot of the low-hanging fruit had been harvested at Coles, and a 1.6 per cent fall in Wesfarmers' share price partly reflected that sentiment. However, McLeod has renovated only half of Coles' 750 stores - he is moving at a rate of about 100 stores a year - and he is boosting profit margins by adding home brands and extracting supply-chain efficiencies. He says he is confident profit growth will outstrip sales growth for years to come.
He will be telling his team there's a way to go. Coles' 9.5 per return on capital is almost twice as good as it was five years ago, but it compares with a 40 per cent return on funds employed for the Woolworths supermarket division, Coles' biggest competitor.
McLeod has profit momentum, and the return-on-capital gap partly reflects the fact that Woolies marked the entire Coles business up to pre-global crisis market values with its 2007 takeover.
The long-term task is to get Coles up to a 20 per cent-plus return on capital employed, and McLeod's EBIT-to-sales benchmark is also set by Woolies. It posted a 6.9 per cent EBIT-to-sales margin in its supermarkets in the December half.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
Wesfarmers reported a mixed set of results: Target's EBIT slid 44% to $136 million and the resources division's EBIT fell 66% to $148 million as coal prices dropped. Those weak spots were offset by strong performances at Coles, Bunnings and Kmart, plus a $579 million capital return to shareholders.
Target's earnings before interest and tax (EBIT) fell 44% to $136 million in the June year, highlighting a significant restoration task for Wesfarmers in that business.
Falling coal prices drove the resources division's EBIT down 66% to $148 million, making it one of the weaker contributors to the group's annual results.
Under Ian McLeod Coles turned 5.2% sales growth into a 13.1% rise in EBIT to $1.5 billion. Return on capital rose from 8.7% to 9.5%, EBIT-to-sales margin increased by 1.9 percentage points to 4.9%, and McLeod has lifted EBIT by about $750 million over five years.
McLeod has renovated roughly half of Coles' 750 stores, renovating at a pace of about 100 stores a year. He is also adding private-label home brands and squeezing supply-chain efficiencies, and says he expects profit growth to outstrip sales growth for years to come.
Bunnings reported a 7% rise in sales to $7.66 billion and a 7.5% increase in EBIT to $904 million, with a strong EBIT-to-sales margin of 11.7% and a 25.9% return on capital employed in 2012–13. Management expects margins may dip slightly as store openings accelerate to meet competition from Masters.
Under Guy Russo, Kmart's EBIT jumped 28.4% to $344 million, its EBIT margin rose from 6.6% to 8.3%, and return on capital increased from 18.9% to 25.9%. Kmart has posted double-digit EBIT increases for four successive years, turning it into a valuable asset Wesfarmers chose to keep after the Coles acquisition.
Coles' return on capital is 9.5%, up significantly over five years but still well below Woolworths' supermarket division, which had about a 40% return on funds employed and a 6.9% EBIT-to-sales margin in the December half. The long-term aim is to lift Coles to a 20%‑plus return on capital employed.
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