It’s hard to believe now, but if you look back 10 years, Wesfarmers was in all sorts of trouble when they paid a big price ($15bn) for Coles, funding the acquisition via debt to then see the onset of the GFC, where the company’s share price fell from a high at the time of $40 to $15 per share. The company was forced to do a heavily discounted capital raising in order to repair the balance sheet.
Fast forward to today and Wesfarmers is trading at record highs, having recently broken through $50 per share, after the company reporting a strong full year result last week, producing an underlying net profit of $2.9bn.
Under the guidance of new CEO Rob Scott, the company has announced a number of changes to the portfolio of assets that it owns and manages. Over the past 12 months, they have sold off the Homebase business in the UK, which proved to be a disaster, and they have also decided to demerge Coles. Scott has said the focus will be on improving the performance of the department store businesses and reweighting the portfolio of assets towards higher growth businesses. In addition, last week the company announced it had sold the balance of its holding in coal mine Bengalla, along with the sale of Kmart Tyre and Auto Services. There is speculation it may also look to sell its pub business.
With its Bunnings business, the focus remains on developing its digital offering, expanding its store network and evolving and expanding its product range. Since 2011, Bunnings has added an average 12 stores pa to its network and will look to continue this rate of expansion with 10-14 stores pa. This will complement an ongoing refurbishment program with flexible store formats and product ranges to suit different locations. Management sees the commercial sector as a growth opportunity and is investing in this area through a wider trade product offering and digital capabilities. Given the commercial sector currently represents around 15-20 per cent of Bunnings’ revenue we see potential for this share to increase over time with ongoing investment.
Regrading the department store businesses, Wesfarmers remains bullish on growth opportunities for Kmart with its market share still relatively small in the categories it chooses to play in. Given the size of the market we see potential for Kmart’s share to continue to grow with continued execution. Kmart has a strong focus on product development with 52 designers across Australia and Asia and over 70pc of products designed in-house. Customer brand perception is strong and it was good to hear management acknowledge there was still plenty of room for improvement in areas such as product quality and reducing costs to deliver even lower prices. Target, on the other hand, remains a work in progress with the ongoing reset of product, price and range
- Justin Still Investment Adviser (Authorised Representative: 000279726) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410