Wesfarmers: Interim result 2013

It's one of the nice things about investing that your best performers get bigger, while your problems get smaller.

This fact was evident in today's half-year result from Wesfarmers, which saw a 15% increase in earnings before interest and tax (EBIT) at Coles take it to 37% of group EBIT (up from 34%), while a 63% fall in EBIT from the Resources division saw its share of the pie fall from 13% to just 5%. Further success with Coles will have an increasing impact on group results, while any further deterioration in Resources can only hurt so much.

Better retailing

Coles increased earnings before interest and tax by 15.1% to $755m, on a 4.8% increase in revenue to $18.1bn (sales grew 3.8% on a like-for-like basis), reflecting an expansion in food and liquor EBIT margins from 4.4% to 4.8%. And all this was despite price deflation of 2%.

The company said the performance was achieved through ‘embedding customer loyalty and trust, improving operational productivity through supply chain efficiencies and simpler in-store processes, and the introduction of new and innovative merchandise initiatives’. We’ll translate that as ‘better retailing’.

The company continues to invest in its store network, with 11 new Coles stores opened during the period, including three new ‘superstores’, while seven smaller stores were closed. 37 store refurbishments were completed during the half.

Bunnings also had a good half, from its higher base, with EBIT rising 6.8% to $518m on revenue growth of 6.0% (3.4% like-for-like), while Kmart shot the lights out with a 24.9% rise in EBIT due to ‘continued improvements in sourcing, inventory management and strong performance in [its] everyday and seasonal ranges’ (again, better retailing).

Off Target

The one blot on the retail performance was Target, where a fall in EBIT margins from 9.0% to 7.1% resulted in a 20.4% drop in EBIT. Target may have been slightly overlooked in the past few years while there have been bigger fish to fry. With Coles beginning to crackle, however, management is clearly now on Target’s case. But it’s a case of one step back and two steps forward, and this result was clearly in the first category.

Elsewhere, insurance had a strong result thanks to higher premiums and lower claims, but coal saw a 63% fall in EBIT to $93m on a 24% fall in revenue, due to lower coal prices. The company doesn’t see much improvement in the short term, and the focus continues to be on cutting costs.

Chemicals, energy and fertilisers EBIT rose 5.1% to $104m, while Industrial and Safety EBIT fell 9.3% to $88m due to a ‘general slowdown in business activity, most notably with mining customers’.

Good business principles

Overall, revenue rose 3.2% to $30.6bn, EBIT increased 5.5% to $2.0bn and net profit jumped 9.3% to $1.3bn. Earnings per share rose 9.2% to $1.11 and an interim dividend of 77 cents was declared (up 10%, fully franked and payable on 28 March).

Net debt at 31 December stood at $4.5bn, giving a net debt to equity ratio of 17%, and the interest bill in the half was covered nine times by EBIT.

It’s an excellent set of results and reflects Wesfarmers’ patient and consistent application of good business principles.

The stock price is up almost 2% following the result and it's up about the same amount since 30 Jan 13 (Hold – $38.32). It's on our list for a detailed review after reporting season and in the meantime we're taking the opportunity to increase our price guides. HOLD.