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Wesfarmers share price rises on strong first-half results

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The Wesfarmers Ltd (ASX: WES) share price is up more than 3% to $46.76 this morning after the ASX conglomerate released a strong set of first-half results.

Bunnings, Kmart, and Officeworks are performing well, although Target stores are underperforming.  

Wesfarmers results 

Wesfarmers reported a 6% increase in revenue, up to $15,249 million in H1 FY20 from $14,388 million in 1HFY19. The result reflected strong sales growth across Bunnings, Kmart, and Officeworks. 

Earnings before interest and tax (EBIT) came in at $1,734 million post the application of AASB 16. Pre-AASB 16 EBIT was $1,637 million, down 0.5% from $1,645 million in the prior corresponding period (pcp). Strict working capital management and disciplined capital expenditure resulted in strong cash flow generation across operating divisions. 

Net profit after tax (NPAT) from continuing operations was $1,127 million post AASB 16, or $1,142 million pre-AASB 16. This represented a 5.7% increase over the pcp. The result was underpinned by a strong performance from the group’s largest businesses, Bunnings and Kmart. 

Dividend 

Basic earnings per share for the half-year period was 101 cents pre AASB 16, a 5.7% increase, or 99.6 cents once AASB 16 is applied.

An interim fully franked dividend of 75 cents per share was declared, down from 100 cents in the pcp, with the reduction reflecting the demerger of Coles and divestment of Bengalla. 

Sales momentum 

Bunnings, Kmart, and Officeworks showed pleasing momentum in sales following strong operational execution and a continued focus on customers.

Bunnings sales increased to $7,275 million from $6,907 million in the pcp. Kmart sales were up to $3,417 million from $3,176 million, while Officeworks sales grew to $1,226 million from $1,100 million. 

Operating and free cash flows 

Divisional cash generation from continuing operations increased 11% to 126%, while operating cash flows before tax for divisions increased 4% to $2,179 million. Reported operating cash flows decreased as the prior period included operating cash flows from Coles and other discontinued operations. 

Additionally, free cash flow decreased compared to the prior year due to the acquisitions of Kidman Resources and Catch totaling $1 billion. Further, the prior period included proceeds from the divestment of Bengalla, Quadrant, and KTAS as well as operating cash flows from divested business Coles. 

Balance sheet and debt management

Wesfarmers reported net financial debt of $2.3 billion at 31 December 2019, up from $2.1 billion at 30 June 2019. Finance costs decreased to $69 million in H1 FY20 due to lower average debt balances and a decrease in all-in effective borrowing costs to 4.78% from 4.90% in H1 FY19. 

Bunnings 

Bunnings delivered revenue growth of 5.3% to $7,276 million. Total store sales growth was 5.8% with store-on-store growth of 4.7%. Earnings increased 3.1% to $961 million.

Eight new store locations were opened during the half alongside eight store upgrades and expansions. Bunnings is continuing to expand its range and investment in customer value is ongoing. 

Efficiency is being driven by data and digital initiatives with product and inventory management being enhanced by the use of analytics. The click and collect service is now available across Australia, while click and deliver is available in over 100 stores. Engagement with clients is also growing with over 700,000 active customers currently on PowerPass. 

Bunnings is looking to finalise its acquisition of Adelaide Tools (subject to regulatory approval) and invest further in digital and data capabilities, including building a click and collect offer in NewZealand.

Moderated trading conditions are expected to continue as customers remain cautious due to weather events around the country, including the bushfires, plus the impact of the coronavirus outbreak. 

Kmart Group

Kmart Group consists of Kmart, Target and Catch. Group revenue for the half-year period increased 7.6% to $4,990 million. Kmart sales increased $241 million, more than offsetting a $67 million decline in Target.

Kmart total sales growth of 7.6% reflected a continued focus on lowest price positioning, stronger operational execution and enhancements to the product range. Growth was achieved across all categories, particularly in womenswear and home. 

Target’s sales decline was driven by a reduction in customer transactions with key categories in apparel performing poorly. The total sales decline was impacted by store closures.

Catch growth continues, with gross transaction value increasing 21.4% in the period under Wesfarmers’ ownership. Click and collect is now offered for some Catch products in certain Target stores. The focus is on continuing to grow gross transaction value at Catch. 

Earnings for the Kmart Group declined 9.9% to $345 million, however, this includes a one-off provision for payroll remediation in Target. Excluding this provision, earnings declined by 7.6%.

Kmart earnings were driven by strong sales growth but were tempered by unfavorable foreign exchange rate impacts and higher team member wages following the implementation of a new enterprise agreement. 

Target earnings were below expectations and declined significantly due to weaker sales performance. Target closed four stores as it continues to reposition its store network. Wesfarmers’ advises that Target’s performance is unlikely to improve materially in the near term.

The focus is on continuing to reduce costs by further leveraging the Kmart Group, accelerating the optimisation of the store network and improving the offer in destination categories. 

Kmart remains well-positioned in the market, opening 5 new stores and completing 10 store refurbishments. It is expected to be able to offset the impacts of lower exchange rates and higher team member wages. 

Officeworks

Officeworks recorded sales growth of 11.5%, with strong growth both in stores and online. Earnings grew 3.9% to $79 million in a competitive environment, with a change in sales mix impacting gross margin.

A new enterprise agreement for store teams has been implemented, however, higher team wages were partially offset by productivity improvements. Productivity improvements are mitigating short term cost of doing business pressures and facilitating investment in long term growth.

The focus is on continuing to improve the customer offer with new and expanded product ranges and ongoing enhancements to improve the online experience.

The Townsville store was expanded during the half and Geeks2U is being rolled out in stores and online. 

Outlook

Bunnings is well-positioned for continued growth with 13 new stores under construction and 5 upgrades and expansions to be completed. Kmart is closely monitoring the coronavirus outbreak and potential impacts on product availability. Meanwhile, Officeworks expects earnings growth will be moderated by ongoing investments in price, team and technology. 

Wesfarmers, as a whole, has a portfolio of cash-generating businesses in leading market positions so it is well placed to deliver satisfactory shareholder returns.

With a strong balance sheet and a diverse and resilient portfolio, Wesfarmers is well-positioned for a range of economic conditions. 

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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. 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 Scott Phillips.

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