COLES GROWTH HELPS TO EASE WESFARMERS WOES AFTER UK HIT

WESFARMERS’ first-half profit plummeted 86.6 per cent to $212 million due to writedowns on its UK hardware business and Target stores, but tentative signs of improvement at Coles supermarkets appear to have cheered investors.

Net profit fell on the back of more than $1.3 billion in previously announced impairments – the bulk of which were made against Bunnings UK and Ireland – but a second-quarter lift in comparable food and liquor sales growth helped Coles deliver better-than-expected earnings margins.

Comparable food and liquor sales growth slipped from 1.3 per cent a year ago to 0.9 per cent for the six months to December 31, but the decline was loaded toward the first quarter as growth returned to 1.3 per cent in the second quarter.

The improvement could suggest Coles was making headway against resurgent rival Woolworths.

Coles’ earnings before interest and tax (EBIT) fell 14.1 per cent to $790 million, partly due to investments in lowering prices, but an EBIT margin of 4 per cent was 0.5 percentage points ahead of that expected by Citi analysts.

Wesfarmers managing director Rob Scott said Coles was expected to continue to improve its business in the second half.

“Coles maintained good sales momentum during the half, with transaction growth accelerating in the second quarter and reaching the highest level of quarterly comparable transaction growth in six quarters,” Mr Scott said.

Wesfarmers maintained its interim dividend at a fully franked $1.03 and, at 1pm yesterday, shares were 3.7 per cent higher at $42.26.

The underperforming Bunnings UK and Ireland chain, which Wesfarmers acquired in 2016, was responsible for $1.023 billion of impairments, with Target carrying the remaining $300 million as its comparable sales contracted by another 6.5 per cent.

Mr Scott reiterated that Wesfarmers was reviewing the future of its UK hardware venture, which has had $70 million set aside for store closures, and said shareholders would be updated in June.

Net profit dropped 2.7 per cent even when significant items were stripped out.

Earnings rose 12.2 per cent at Bunnings Australia and NZ, by 9.7 per cent at Officeworks, and by 7.2 per cent at the department store unit underpinned by Kmart.