Wesfarmers boss Rob Scott expects key retail brands Bunnings and Kmart Group to be weather any downturn as households budgets come under pressure from rising interest rates this year because customers will tackle more do-it-yourself projects and search for better deals at the discount stores chain.
The WA-based conglomerate was confident enough about its long-term prospects to increase its final dividend despite a slight fall in group profits in the 2022 fiscal year to $2.35 billion.
Mr Scott warned continued staff absenteeism has been tracking “quite a few percentage points higher” and putting pressure on costs across all businesses. A critical shortage of skilled labor and rising costs are also increasing the risks of new investment projects and making it harder to commit to them.
“I would guess that most businesses in Australia are facing that additional cost pressure through higher absenteeism levels. And I think that will be a persistent feature as we continue to live with COVID,” he told AFR Weekend.
The Perth-based company said retail trading conditions had remained robust through the first seven weeks of the 2023 financial year, with particularly strong sales in Kmart Group, which includes Target, after the discount chains suffered big falls in profits over 2022.
Mr Scott said the Australian economy was starting from a strong base, with a near 50-year-low unemployment rate and high levels of household savings, but surging inflation and higher living costs were placing pressure on many parts of the economy, including household budgets.
The company’s largest earnings generator, hardware giant Bunnings, had enjoyed positive sales growth so far in the new financial year, while sales at Officeworks were in line with the prior year.
Mr Scott’s comments came after the company reported a statutory net profit of $2.35 billion for the year, topping many analysts’ predictions. Excluding significant items in the prior period, net profit declined 2.9 per cent for the year, but increased 13.1 per cent in the second half as restrictions eased and trading conditions improved .
Revenue increased 8.5 per cent to $36.84 billion, while earnings before interest and tax fell to $3.63 billion from $3.78 billion a year ago.
Wesfarmers shares gained 69¢ to $48.33 on Friday after the strong bounceback in the second-half allowed the company to declare a higher a final dividend of $1 a share, taking dividends to $1.80 for the year.
The group’s Mount Holland lithium project is also on track, but Mr Scott said that with rising cost pressures and the skilled labour crisis, he was finding it harder to commit to other investment projects under consideration, including doubling the capacity of Mount Holland and capacity expansions in its chemicals unit.
“All I’m saying is that in the current environment, the cost and the risks are higher than they should be. And we’re hoping that if we can see some progress on skilled migration, that will go a long way to giving us the confidence to move ahead with some of these major investments,” he said.
Wesfarmers boss Rob Scott says retail sales so far this year are robust. Trevor Collens
Mr Scott said the group’s 2022 financial results were seriously affected by COVID-19 in the first half, when almost half of its stores were subject to trading restrictions or closed for weeks.
Conditions improved over the June half, but sales at Kmart Group still fell by 3.5 per cent to $9.64 billion over the year – dragged lower by Target, where revenue tumbled nearly 16 per cent. Earnings slid by about 40 per cent for Kmart Group, which also included online marketplace Catch Group.
Wesfarmers snapped up Catch in June 2019 for $230 million in the hope of building out online sales at its discount retail chains. Catch is now part of a new data and digital division, OneDigital, and is expected to post a loss this year.
Jarden analysts led by Ben Gilbert said the full-year results were good, with Kmart a standout, and the retail division’s momentum was strong and likely to persist in this half-year period.
MST Marquee analyst Craig Woolford was cautious about the outlook for calendar 2023, and noted if elevated costs continue, there could be pressure on earnings in the 2024 financial year.
Kmart stock availability improved through the second half, and was now deliberately carrying some additional everyday-type products to mitigate any supply chain pressures.
Mr Scott warned there is some volatility and cost pressures are persisting across some raw materials, freight and operating expenses.
Mr Scott told a media call that he felt good about the outlook for Bunnings despite interest rates going up and house prices coming under pressure, hardware giant’s sales increased 5.2 per cent to $17.75 billion for the year, and earnings increased 0.9 per cent to $2.2 billion.
Bunnings managing director Mike Schneider said for the first time in three years, stores in Victoria could trade through the spring and Father’s Day, which was a big driver of sales for the retailer.
He noted the $70 million in COVID-19 costs in the year should moderate, as the weather warms up in the summer and there is less flu and other illnesses causing sick days.
Despite the exceptional growth in Bunnings over the past few years during which it added $4.6 billion to its top-line sales and earnings climbed beyond $3 billion, Mr Schneider saw no slowdown because of the structural shift in the way customers think about their homes.
“It’s become a workplace, to become a classroom, and they are spending more time at home. When you’re working from home two to three days a week, there is more wear and tear on the house, and you see more things to do,” he told analysts.
“Over the last few years, customers have actually really developed quite a new array of DIY skills, and we’ve been able to bring the products and services and categories into the market to be able to meet those needs.”
Mr Scott said there was strong demand on the commercial side of Bunnings, with shortages of tradies and builders evident with a pipeline of work, while on the consumer side there was still solid DIY demand.
The cost of raw materials such as timber, cotton, polyester and plastic resin had all started to come back, which would eventually flow though to customers, he said. He added, however, that inflation would persist in coming months.
Officeworks’ revenue increased 4.6 per cent for the 2022 year to $3.17 billion, but earnings were 14.6 per cent lower due to trading restrictions and increased investment in the supply chain, data and digital capabilities.
Wesfarmers’ retail businesses form six of Australia’s largest retail brands, with more than 150 million digital interactions and 40 million transactions each month and a network of more than 1500 retail stores.
Sales have been strong recently at its latest aquisition, Australian Pharmaceuticals Industries (API), which is the key asset sitting in Wesfarmers’ new health unit. Mr Scott has big plans to create a $10 billion healthcare division, after the $774 million takeover was completed earlier this year, but presently is thinking about the integration and kind of investments needed to transform the business.
Mr Scott said while there was a lot of focus on the short term, he had been positioning the business for the long haul.
“We’ve made enormous progress, setting our group up to the future investment in health investments and in lithium and in digital platforms. So whilst the market is very focused on the next few months, to be frank, I’m more focused on the next few years,” he said.
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