Wesfarmers: Result 2014
Recommendation
By analysing huge volumes of purchases US retailer Target famously discovered that pregnant women bought lotion and nutritional supplements such as magnesium and zinc by the truck load two-thirds of the way through their pregnancy. It was the perfect time to flood expectant mothers with myriad offers to ensure a smooth pregnancy and minimise the lasting effects of carrying around another human for nine months.
Unfortunately a man became enraged when his daughter, who was still at high school, also received these offers. A Target manager apologised and called a week later to see if everything was ok. To his surprise the father apologised, ‘It seems like there has been some activity going on in my house I didn’t have any awareness of.’
This is an example of Big Data, where retailers analyse your shopping habits to entice you back to their stores. Wesfarmers is well placed, as it collects your data whenever you shop at Coles, Bunnings, K-Mart, Target, Liquorland or fill up at a Shell service station. My wife already receives emails from Coles when items she purchases frequently go on sale, but a raft of initiatives is headed your way.
Key Points
- Another great result
- Plenty of work left to improve Coles
- Sticking with HOLD
Coles
Coles increased sales 4.5% to $37.4bn, though same-store-sales increased 3.7%, down from 4.3% a year earlier. While that’s not particularly impressive the 12.3% increase in operating profit from the food and liquor division is, particularly as the liquor division is performing poorly. The convenience stores suffered a 17.6% fall in profit as petrol volumes dropped 3.9%.
Coles has been rejuvenated and currently produces 42% of Wesfarmers’ operating profit, but by management’s own admission it ranks well below world-class standards.
Year to 30 Jun | 2014 | 2013 | /– (%) |
---|---|---|---|
Revenue ($bn) | 62.3 | 59.8 | 4.2 |
EBIT ($bn) | 3.8 | 3.7 | 3.5 |
Net profit ($m) | 2.4 | 2.3 | 6.1 |
EPS ($) | 2.09 | 1.96 | 6.8 |
PER | 21 | 23 | n/a |
DPS ($) | 1.90 | 1.80 | 5.6 |
Div. Yld (%) | 4.3 | 4.0 | n/a |
Franking (%) | 100 | 100 | n/a |
Final div. | $1.05, fully franked, ex date 29 Aug |
The big opportunity to expand margins and return on capital, which is languishing at just 10.3%, lies in a more efficient supply chain. That’s been the backbone of Woolworths’ success over the past decade. The beauty of this problem is that management has the ability and money to fix it, so even if sales don’t grow quickly in a tough economy management still has the power to increase profits and dividends.
Coles is also using your data to launch a raft of new services, starting with a financial services joint venture with GE Capital. New products include life insurance, a no-fee credit card and Coles Mobile Wallet. These, along with car insurance, for example, are designed to eat into the enormous profits currently being enjoyed by the oligopolies in the general insurance industry, such as Suncorp and Insurance Australia Group, and the banking industry, including the big four banks. Coles has information on virtually every Australian with a credit card to draw on but it’s unlikely to worry the incumbent players.
Further examples of using Big Data include the expansion of the $10 discount on groceries for financial services customers via flybuys redemptions, and Coles sent more than two million ‘My Weekly Specials’ emails per week. It won’t be long before tradesmen receive offers from Bunnings on the back of their petrol dockets.
We wouldn’t count Big Data as a competitive advantage, as Woolworths is investing in this area as well. But as Wesfarmers will be able to offer discounts across its wide variety of businesses every little advantage helps.
Year to 30 Jun | 2014 | 2013 | % |
---|---|---|---|
Coles | 1,672 | 1,533 | 9 |
Bunnings | 979 | 904 | 8 |
Office Supplies | 103 | 93 | 11 |
Kmart | 366 | 344 | 6 |
Target | 86 | 136 | (37) |
WesCEF | 221 | 249 | (11) |
Resources | 130 | 148 | (12) |
Industrial & Safety | 131 | 165 | (21) |
Insurance | 220 | 205 | 7 |
Divisional EBIT | 3,908 | 3,777 | 3.5 |
Bunnings
If you’re wondering why Woolworths’ is ploughing so much time and money into its home improvements concept, Masters, look no further than Bunnings’ results. Revenue increased 11.6% to $8.5bn and operating profit increased 8.3%. Better yet, return on capital increased from an already impressive 25.9% to 29.3%. As the challenger we don’t expect Masters to ever rack up these sorts of returns, but it suggests there’s plenty of room for a second large player if Woolworths can stay the course over the next decade.
The rest of Wesfarmers businesses are becoming increasingly marginalised, though Target remains particularly problematic due to poor management, cost deflation and intense competition.
We commend management for selling the insurance business to Insurance Australia Group, as it lacked the scale to compete with the giants of the industry and it fetched a decent price while the insurance industry is at or near a cyclical peak. It also paved the way for a $1.00 return of capital (part capital return part dividend) later this year following a healthy increase in the dividend and a special dividend of 10 cents.
Wesfarmers encapsulates everything an investor could hope for in a high quality company, except a dirt-cheap price. It owns two of the best defensive retailers in Australia, still has plenty of money to invest in Coles at high rates of return and is producing plenty of free cashflow to increase dividends.
We’ll consider increasing the prices in the recommendation guide when the share price approaches $50, but with the share price increasing 3% since Supermarket superwars - Part 1 from 1 Aug 14 (Hold – $43.33) we’re sticking with HOLD.