Wesfarmers profits collapse as a result of Homebase

On Wednesday, Wesfarmers the owner of Homebase and Bunnings Warehouse in the UK, announced their half-year results to the Australian Stock Exchange.

The costs of overhauling Homebase resulted directly in a huge slump in profits for the second half of their financial year. The company purchased Homebase in 2016, but self-inflicted errors by the Aussie management team hurt the bottom line, with profits declining 86.6% resulting in their lowest reported half-year profits for over a decade.

Here's the detail:-

Wesfarmers Limited has reported a net profit after tax (NPAT) of $212 million for the half-year ended 31 December 2017. The reported profit includes post-tax significant items of 1,323 million relating to Bunnings United Kingdom and Ireland (BUKI) and Target. Excluding these significant items, NPAT for the half-year decreased 2.7 per cent to $1,535 million.

Download the Wesfarmers briefing presentation here.

Managing Director Rob Scott said the continued strong momentum in Bunnings Australia and New Zealand (BANZ), Kmart and Officeworks, in a competitive retail environment, was a highlight for the half.

“Strong production volumes and higher coal prices in the Resources business contributed to a significant increase in the Industrials division’s earnings,” Mr Scott said. “Higher earnings across a majority of the Group’s businesses were offset by losses in BUKI and lower Coles earnings following planned investments in price and service.

“The Group generated record operating cash flows of $2,897 million for the half, supported by proactive working capital management. Strict capital disciplines were maintained and the Group retained a very strong balance sheet, with improvements achieved in its credit metrics.

“In December 2017, the Group announced an agreement to sell the Curragh coal mine for $700 million, which also includes a value share mechanism1 that allows Wesfarmers to participate in possible future coal price increases. On successful completion of the transaction, which is subject to a number of conditions precedent, the Group expects to record a post-tax profit on sale of approximately $100 million.

“In line with the Group’s dividend policy, which considers earnings, cash flows, franking credits and credit metrics, the directors have declared an interim dividend of $1.03 per share, in line with the previous corresponding period.”

Insight & Analysis

Please find below an exclusive comment for Insight DIY from Fiona Cincotta, a senior market analyst at https://www.cityindex.co.uk/

"To say that the rebranding of Homebase to the Australian Bunnings fascia has not been going well, is a massive understatement. This a botched job at its best. Losses continue to grow at Bunnings UK, to a whopping £97 million in the first half, from £27 million in the same period a year earlier. The fact that Homebase was profitable just two years prior to the takeover by Australian Westfarmers highlights the incompetence at work here.

This disastrous, untested attempt to transfer the Australian brand to the UK, where consumers behave and shop differently to Australia could end up costing up to 2000 jobs and potential closure of 40 UK stores. The DIY business is in a sticky moment anyway, with an increasing preference for “do it for me” over “DIY”. Should homeowners continue to go down the route of calling in professionals, the costs to Bunnings’ owners Westfarmers could stack up even higher. The firm will take a decision in Jun over how they will proceed with this disastrous takeover job."

Source: Insight DIY Team & Wesfarmers Press Release

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