Is Wesfarmers Ltd winning the supermarket war?

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As I previously reported, on Wednesday conglomerate Wesfarmers Ltd (ASX: WES) released a respectable interim profit result. However it wasn’t enough to please the market with the stock ending Wednesday’s trading session down a whopping 4.9% at $41.50.

While in days gone by Wesfarmers’ fortunes have been tied to industries such as agriculture and insurance, today the company is very much a retail sector focussed business.

To highlight this situation, consider the following fact – of the $33.5 billion in revenues reported for the six months ending December 31, only around $2.2 billion related to Wesfarmers’ non-retail business divisions.

As a contributor to earnings the importance of the retail division is even more stark. Of the group’s $2.1 billion in earnings before interest and tax (EBIT), the industrial businesses contributed just $22 million to total earnings!

Breaking down the earnings of the retail division and the three largest contributors to group EBIT were Coles with $945 million, Bunnings with $701 million and Kmart with $319 million. While Bunnings’ importance to Wesfarmers is undeniable, it’s obvious that Coles is the primary driver of the group’s earnings.

Given the significant upheaval occurring within the Australian supermarket sector, which includes the aggressive expansion of discount supermarket chain Aldi, the operating performance of Coles is certainly worth paying attention to.

Here’s what management had to say about Coles:

  • Continued good momentum in food and liquor
  • Operational simplification and supply chain efficiencies drove further investment in value and improvements to customer offer
  • Fresh offer improvements supported growth in transaction volumes, basket size and sales density
  • The convenience sector grew earnings in line with the division, supported by strong shop sales growth and despite lower fuel volumes and lower average fuel price

These operational results helped Coles achieve an improved financial outcome with the food and liquor division achieving revenue growth of 6% to $16.5 billion. Overall,  the Coles division recorded revenue growth of 3.1% to $20.1 billion and EBIT growth of 5.6% to $945 million.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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