Wesfarmers: Firing on all cylinders

Wesfarmers Limited (ASX: WES) has today reported an increase in profit by 10.6% to $2,126 million, and increased its fully-franked final dividend to 95 cents, up by 11.8%.

The Coles business, which includes food, liquor and petrol, remains the engine room for Wesfarmers, producing 37% of the company’s earnings before interest, and tax (EBIT), followed by Bunnings and Officeworks, which provide a combined 25% of EBIT. Coles increased EBIT by 16%, while Bunnings increased EBIT by 4.9%. Kmart continues its turnaround, with EBIT jumping by 31%.

The continued success of Coles versus rival Woolworths Limited (ASX: WOW), and Kmart versus Big-W is masking issues in Target as well as its insurance business. Wesfarmers has taken a $40m restructuring provision on Target, as the company continues to focus on differentiating the brand from Myer Holdings Limited (ASX: MYR), David Jones Limited (ASX: DJS) and other mid-tier department stores. Whereas Kmart and Big-W (owned by Woolworths) are focused on low prices, Wesfarmers continues to position Target as higher quality style and experience and not just price.

The Christchurch earthquake, and bushfires and storms in Western Australia affected the insurance business, while the chemicals division has been hit by increased costs, despite revenues increasing 8%.

Pleasingly, the company’s return on shareholders’s funds (equity) has improved to 8.4% from 7.7% in the previous year, but still remains low compared to Woolworths return of around 27%.

Wesfarmers continues to invest in its brands, spending $2.4 billion in capital expenditure, with almost half of that going into the Coles business. The company has forecast to spend between $1.7 and $2.1 billion in the 2013 financial year, and expects continued momentum in Coles, Kmart and Officeworks.

The Foolish bottom line

As a diversified company, often some of Wesfarmers businesses will underperform while others are going gangbusters. Time will only tell whether Wesfarmers can turnaround Target and the insurance businesses (by which time, other parts of the business may be struggling).

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Motley Fool writer/analyst Mike King owns shares in Woolworths. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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