Stock of the Day – Wesfarmers (WES) 

Wesfarmers delivered an adjusted 6% increase in fiscal 2014 net profit after tax or NPAT of AUD 2,398 million with revenue up 4% to AUD62.3 billion. The retail assets which contribute to 85% of earnings is the largest driver to growth offsetting weakness from the resource and industrial safety divisions. Coles and Bunnings remain the standout contributors to group earnings as they continue to increase their operating margins by lifting sales volume while offering customers better value by lowering product prices.


Distributions to shareholders (Source – Company Reports)

With food and liquor sales of AUD 29.2 billion from Coles, and AUD 8.5 billion in hardware sales from Bunnings, the group generates cost advantages by negotiating favorable term from suppliers and spreading operating costs over a large revenue base. Coles increased fiscal 2014 revenue by 4.5% to AUD 37.4 billion with earnings before interest or tax or EBIT up 9% to AUD 1,672 million.


Ongoing gains in supply chain efficiency (Source – Company Reports)
 
Both Coles and close competitor Woolworths are aggressively rolling out more stores to build scale and so ramming home their competitive advantage from distributing operating costs over a larger revenue base. We expect the supermarket industry to further consolidate around both Coles and Woolworths at the expense of the smaller independent retail channel which will find it increasingly difficult  to match prices from majors and generate acceptable  returns.


WES Daily Chart (Source – Thomson Reuters)

Bunnings increased fiscal 2014 revenue by 12% to AUD 8.5 billion with EBIT up 8.3% to AUD 979 million. These reflect strong demand by consumers for the Bunnings hardware business model  with like for like sales growth up 10% in the fourth quarter and operating margins which many retailers would envy at 11.5%. Bunnings has 80 stores in the pipeline and 19 under construction with the group making it increasingly difficult for Woolworths with its master brand to capture a sizeable segment of the big box hardware market. We reiterate our HOLD recommendation on Wesfarmers.

Note - This report was covered under the Kalkine Daily section on 02/09/2014.

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