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 companys 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 conglomerates 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 years 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. Its 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 governments 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.
Frequently Asked Questions about this Article…
Why did Wesfarmers share price jump after the recent Wesfarmers result?
Wesfarmers’ stock rallied to 15-month highs after the company reported a strong result (group profit rose 10.6%). Investors responded especially to the continued improvement at Coles and solid cash flow, lifting the share price about $1.23 to $33.72 on the day.
Is Wesfarmers meeting its return on capital targets?
No — Wesfarmers’ return on capital remains below the long‑stated targets. CEO Richard Goyder admits the company hasn’t met that hurdle since acquiring Coles five years ago, which gives management incentive to keep improving returns.
How is Coles performing as part of the Wesfarmers group?
Coles is a standout: supermarket profit rose an impressive 16.3% and management says growth shows no sign of easing. The supermarkets are performing well, but the liquor business remains a problem that will take time to fix as Coles completes its five‑year turnaround.
What retail divisions of Wesfarmers are delivering the strongest results?
Kmart and Bunnings were notable performers. Kmart’s earnings jumped 32.3%, helped by its discount positioning and cost improvements, while Bunnings continued a long run of solid performance with earnings growth of about 4.9%.
How is Coles’ strategy of lowering prices affecting suppliers and competitors?
Coles says lower everyday prices come mainly from internal cost efficiencies, but the article notes the supermarket is also paying suppliers less while offering more volume. That squeeze can harm suppliers — Goodman Fielder’s results show the cost of competing on price — and it puts pressure on rivals like Woolworths.
What is Wesfarmers’ cash flow and capex situation, and what does it mean for investors?
Operating cash flow is up almost 25% and the group plans to trim capex this year. That combination creates scope for acquisitions in the future, but CEO Richard Goyder appears focused on improving existing businesses rather than hunting for new deals right now.
What do Wesfarmers’ leaders say about consumer sentiment and the outlook for retail?
Goyder says poor consumer sentiment is understandable — people are watching global economies and asset falls — but he believes Wesfarmers’ retail brands are well suited to cautious, value‑driven shoppers. The market is also focused on forward outlook statements, and Coles has given no sign its growth will slow.
Will leadership changes at Coles affect investors?
Ian McLeod, who led the Coles turnaround, is staying for another term, which the market views positively for continuity. The article notes his pay may be reduced at renewal, but his continued leadership reassures investors focused on Coles’ ongoing transformation.
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