Australia’s Coles Myer expected to post rise in net profit
Coles Myer will defy a slowdown in spending by consumers hurt by high petrol prices to deliver a 15 to 20 per cent lift in annual net profit.
The continued strong growth by Australia’s biggest retailer is being driven by supply chain initiatives, which will steer the group’s net profit to between A$670 million (US$511.6 million) and $680 million for 2004/05, before significant items including preference dividends.
Coles Myer announces its annual result on Thursday with analysts saying the group, despite the pain at the bowser, is on track to achieve its aspirational $800 million net profit target for 2005/06.
Unveiling a 13.3 per cent lift in total annual sales to $36.6 billion last month, Coles Myer chief executive John Fletcher flagged a 17 per cent rise in underlying earnings to around $675 million for the 2004/05 year.
But Mr Fletcher said the fourth quarter was a tough one due to the high petrol prices that impacted the typical consumer’s general retail spending by $20-30 a week.
He said he expected consumer spending to remain tight in the next six months because of petrol prices.
Shaw Stockbroking head of industrial research Scott Marshall said there are signs consumer spending is slowing down.
He said Coles Myer is hurting in the discretionary spending areas that affect Target, Myer and Kmart but is making up for it through its petrol joint venture with Shell, where customers get a four cents per litre fuel discount after spending $30 or more at Coles.
Analysts, however, said the real driver of the profit result would be the retailer’s supply chain initiatives.
FW Holst retail analyst David Spry said Coles Myer can expect a reasonable margin improvement brought about by reduced costs.
“The supermarket growth rate was a little disappointing in the last set of numbers but I still think the profit will be okay,” he said.
“We’re not just looking at top line sales growth – you are going to start to see benefits of the supply chain strategy coming through.”
In the fourth quarter, comparative sales from Coles Myer’s traditional engine room of food and liquor rose just 1.1 per cent compared to rival Woolworths, which gained 3.5 per cent.
Mr Marshall said Mr Fletcher’s background in logistics is starting to pay off for the retailer.
“Warehouse structures, distribution, warehouse to shop, in-store inventory levels and in-store movement of goods – it all sounds esoteric but they are very important for cost reductions,” Mr Marshall said.
He said better rostering of staff and direct purchasing of goods from China, cutting out the middle man, is also reducing costs.
The supply chain changes, introduced in 2003, required a $600 million investment over five years which would deliver a $425 million per annum reduction in total supply chain costs by the 2008 financial year.
The market is also awaiting further news on Coles Myer’s plans for its Myer department stores. Coles Myer is looking at three options for Myer – sell it off, demerge it as a separately listed company on the ASX, or retain it in a streamlined version, with possibly 20 of its 61 stores closing.
Mr Spry said he is now treating the department store as a non-core asset. “Even if its results are weaker than expected it won’t take too much gloss off because most people are anticipating they won’t have it going forward,” Mr Spry said.
