23 November 2019
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Woolworths One, Coles Nil

Andrew Main
20 February 2019

Woolies, reporting on February 20, managed a 2.1% rise in net profit to $920 million in a result well buttressed by incremental gains across the board.

Coles’ equivalent number, reported on February 19, was a drop of 14% in reported net profit to $738 million.

Coles CEO Steve Cain did a Curate’s Egg analysis of the result by calling it “a solid outcome in a challenging retail environment.”

The Australian Financial Review called the Coles result a quasi-profit downgrade, which is a perfect example of how the same set of numbers can be interpreted in different ways.

Mr Cain said that Coles had achieved unprecedented earnings growth under Wesfarmers’ ownership, but now needed to reset its strategy to set the retailer up for sustainable long-term growth.

The AFR noted that Coles’ earnings had risen by 125% between 2009 and 2016 but had subsequently fallen over the last two years, with analysts forecasting a fall in EBIT (Earnings before Interest and Tax) for the full year to about $1.25 billion.

Coles’ reported EBIT for the first half was $733 million, down 5.8% on the supermarket group’s equivalent number for the second half of calendar 2018, and that’s before making one-off adjustments relating to improvements in the supply chain at Coles, which was only spun out of Wesfarmers in November of last year.

That EBIT number was despite sales revenue climbing 2.6% for the half to $20.8 billion. Clearly, the analysts expect further grief if they’re saying the company will only make just over $517 million in EBIT in the second half.

Mr Cain only took over the reins at Coles in September, so this is the perfect time for him to publish all the bad news in the hope that from now on he can afford to be more upbeat..

The Coles story seems to be that costs have been rising faster than sales, not helped by the impression that the Australian consumer had a crisis of confidence in the December quarter, although Woolies did not appear to have anything like the same problem..

Like-for-like sales at Woolies were up 2.7% in the second quarter compared, with Coles’s skinny improvement of only 1.3%.

Coles shareholders already knew before the results announcement that they weren’t going to get a dividend for the half, since the company was only formally spun out of parent Wesfarmers in November of last year. They will get a div from Wesfarmers, which will hopefully bring them some better news when it reports on Thursday.

The dividend will relate to the four and a half months of the December half year when Coles was still part of Wesfarmers, so don’t hold your breath for a bonanza.

The market didn’t like the Coles result much at all, marking the stock down more than 50 cents to $12.02 on Tuesday and a further 42.5 cents  to $11.65 in Wednesday morning trading, against the general market trend. The slide has continued and the last price I have is $11.45, which is more than 5% down on the day.

That values the company at $15.3 billion.

Wesfarmers originally paid $19.5 billion for Coles in 2008, shortly before the Global Financial Unpleasantness. That said, Kmart, Target and Officeworks were transferred to Wesfarmers during the demerger, so we’re not comparing like with like.

Woolworths shares were down $1.54 at $28.71 or just over 5% in the wake of its profit announcement which fell short of expectations, valuing the company at more than $37.5 billion.

A further complication in Coles’ reporting is that the retail chain has decided to calculate its earnings on what it calls the Retail Calendar rather than the Gregorian Calendar. Before you think they’ve been secretly chanting and wearing sackcloth robes, it’s just a longwinded way of eliminating the imbalance between half years that might say be 27 weeks in the first half and 25 weeks in the second half.

Among the other less thrilling pieces of news from the new Coles listing was that not only has the demerger cost the new company around $25 million in one-off costs to be absorbed this financial year, but it’s going to cost the company around $66 million in extra corporate costs per financial year to operate and report as a separate entity.

They include ASX listing costs, share registry, insurance and external audit fees, none of which look like reducing any time soon.

Meanwhile it didn’t help investors’ attitude to Coles on Tuesday when Woolworths announced they were going to charge shoppers an extra 10 cents a litre for milk and send the difference straight on to the dairy farmers.

Coles has yet to respond to what is a bit of a stunt but which is at least a modest reward for the poor old farmers, who have been deserting the industry in big numbers recently because they simply can’t make a decent living.

That’s thanks to the low prices they’ve been being paid following pressure by… Coles and Woolies.

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