Wesfarmers Falls as Target Profit Slump Erodes Coles Growth

Wesfarmers Ltd. (WES), Australia’s largest private-sector employer, declined after a 53 percent first-half earnings slump at its Target department stores ate up almost all the growth in its Coles supermarkets.

Wesfarmers fell 0.5 percent to A$43.18 at the close in Sydney. The stock has dropped 2 percent this year, compared with the 1.1 percent gain in the benchmark S&P/ASX 200 index.

The company, based in Perth, is counting on improving retail revenues to compensate for the effects of slowing mining investment on units that sell coal, chemicals and industrial equipment. Earnings before interest and tax that increased by A$81 million at its Coles supermarkets chain were weighed down by a A$78 million decline from its Target stores.

“The coal is horrible and Target was fairly horrible,” said Evan Lucas, a market strategist at IG Markets Ltd. in Melbourne. “They should probably think more about unstapling these underperforming assets.”

Net income increased 11 percent to A$1.43 billion ($1.29 billion) in the six months ended December, Wesfarmers said in a regulatory statement today. That exceeded the A$1.39 billion median of five analysts’ estimates compiled by Bloomberg.

Coles, Bunnings

First-half group earnings before interest and tax, or Ebit, rose 5.4 percent from a year earlier to A$2.15 billion. Coles earnings climbed 11 percent to A$836 million and those from the Bunnings hardware chain increased 8.5 percent to A$562 million.

Ebit at the Kmart discount department store gained 5.7 percent to A$260 million, while the measure slumped 53 percent to A$70 million at the Target chain as discounting of winter stock delayed the introduction of spring and summer collections.

Trading at Target “is expected to remain challenging” for the rest of the year to June, the company said.

“None of us is going to say that’s a result we’re happy with,” Managing Director Richard Goyder told a media call after the results. “There is much to do to turn Target around,” he said on an earlier investor call.

Earnings at the resources division dropped 37 percent to A$59 million.

Wesfarmers is counting on improvement in Australia’s consumer sector as the Reserve Bank of Australia holds interest rates at a record-low 2.5 percent.

Consumer Sentiment

Retail sales picked up during the December quarter last year, the RBA said in a quarterly monetary policy statement Feb. 7. At the same time, an index of consumer confidence fell to a nine-month low this month.

“Unfortunately it’s the job losses that get the headlines,” Goyder said on the media call, referring to cuts announced this week at Alcoa Inc.’s Point Henry smelter and reports about Telstra Corp.’s Sensis directories unit. “Consumer sentiment is still somewhat fragile and I think we all need to be careful” not to talk down the economy, he said.

Coles supermarkets accounted for about 42 percent of group earnings before interest, tax, depreciation and amortization during the year ended June 30 with the Bunnings, Officeworks, Kmart and Target stores making up a further 38 percent.

Second-quarter sales from Coles stores open at least 12 months increased 3.8 percent from a year earlier, compared with the 3.4 percent growth reported on Feb. 6 by market-leader Woolworths Ltd.’s food and liquor stores. Coles has now beaten Woolworths on the measure for 16 consecutive quarters, according to data compiled by Bloomberg News.

To contact the reporter on this story: David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

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