Wesfarmers
Recommendation
Wesfarmers sales results for the first quarter of the 2012/3 financial year, released on Thursday, were broadly in line with expectations. Coles saw a 3.7% rise in same-store food and liquor sales over the quarter, beating Woolworths (2.3% growth) for the 13th consecutive quarter. However the gap narrowed somewhat from 1.7 to 1.4 percentage points.
Liquor was again the main disappointment for Coles, representing a drag on total food and liquor sales of ‘just under 1%’ according to management. However, work continues on improving the performance, with 6 new liquor stores opening during the period and 10 stores being closed, while a shift towards wine sales should help margins.
Elsewhere, Bunnings performed reasonably well, helped by new space, with 6 new stores opened during the period and 11 under construction.
Wesfarmers also announced a 6.5% fall in overall coal production in the quarter due in part to a strong performance in the previous quarter. Average coal prices are set to fall about 26% in the December quarter, compared to the September quarter.
Overall, the performance was solid and suggests that the turnaround at Coles is continuing. But, with a current year price to earnings ratio of about 17, compared to 16 for Woolworths (which we upgraded earlier in the week), some further improvement is already priced in. The stock is also higher risk than Woolworths, with supermarkets contributing only 37% of group earnings before interest and tax in 2012 compared to about 90% for Woolworths.
The stock is up slightly since our last review on 17 Aug 12 (Hold – $33.72) and we'll be having a closing look at the company in coming weeks. In the meantime, we're happy to stick with HOLD.