Wesfarmers’ winners and losers: Coles, Bunnings and Kmart boost profit to $2.126 billion

Strong performances from Coles, Bunnings and Kmart have bumped Wesfarmers net profit after tax for the year up to $2.126 billion.

The results, released yesterday, showed an increase of 10.6% on the previous year that was well ahead of market expectations.

Wesfarmers is known as a diversified organisation as it generates income from a host of different businesses, but food and alcohol form the backbone of the group. This was made clear in the yearly results, which showed clear winners and losers amongst the group’s businesses.

The winners

Coles

Coles was a star performer for Wesfarmers, with earnings before interest and tax rising more than 16% over the year to $1.3 billion.

Ian McLeod, managing director of Coles, pointed to the supermarket’s investment in lower prices, which he said was set to continue with Coles’ “down down” campaign.

He also noted Coles’ category innovation, with over 1,000 new brands introduced over the past year and Coles’ clothing line, Mix clothes, now stocked in over 67 Coles stores.

Coles has also driven profits through the revamp of its FlyBuys loyalty program, which has more than seven million cardholders.

However, McLeod said Coles Liquor had a disappointing performance in 2012 due to increased competition from “big box” alcohol stores.

Bunnings

Bunnings delivered earnings before tax of $841 million, which was ahead of estimates with an increase of almost 5%.

Tom Piotrowski, market analyst at CommSec, said Bunnings’ strong performance defied the tough conditions in the building and renovation sectors and was ahead of estimates.

“Bunnings is an area the market has been treating with some caution. We hear a lot about light demand for credit in all forms and the fact that the building and renovation market is still experiencing degrees of headwinds,” he said.

The home improvements chain opened 16 new stores and reported “strong investment” in its property pipeline and existing stores.

Kmart

The discount department store Kmart continued to perform well ahead of expectations, with earnings before tax of $266 million.

Guy Russo, managing director of Kmart, said in his results presentation that Kmart was continuing to lead on price and value and was continuing to source at lowest cost.

The Losers

Target

Target did not fare as well as other businesses in the Wesfarmers group, with earnings before interest and tax of $244 million.

“Target and its numbers are quite conspicuous, but this is an area Wesfarmers expects benefits from over the coming years,” said Piotrowski.

“In fact, the group is only in the early part of a four-year turnaround where Wesfarmers is trying to reposition the Target brand, as they believe there is a gap in the market for a mid-tier department store.”

Part of the reason for Target’s underperformance was $40 million provisioning taken for streamlining supply chain issues, an amount flagged by Dene Rogers, Target’s managing director in his results presentation.

Rogers said Target was refocusing on quality, style and experience rather than just price.

Insurance

Wesfarmers’ insurance division took a $108 million hit for provisioning as a result of the Christchurch earthquake.

“When you take that out of the equation, the insurance business actually performed quite well and this is an area that is expected to continue to improve,” Piotrowski said.

Rob Scott, the managing director of Wesfarmers’ insurance division, said in his presentation that the Christchurch earthquake was the largest ever insured loss in the southern hemisphere.

He hopes to get the insurance division back on track through strong momentum from premium rate increases.