Wesfarmers shares drop on disappointing first half profits

Shares in Australian conglomerate Wesfarmers took a bath on Wednesday, falling nearly 5% after first-half profits failed to impress.

However, this may be cold comfort for UK retail giant Kingfisher, whose B&Q do-it-yourself store chain is set to be the main competitor to Wesfarmers’ Bunnings brand once the Australian company takes over Homebase, which it is expected to do at the weekend.

Why? Well, although Wesfarmers’ 1.2% profit increase to A$1.39 billion (£720 million) was less than the A$1.43 billion the markets had hoped for, the headwinds were largely confined to the company’s mining operations. Like everyone else’s they are struggling with low commodity prices, but the company’s retail operations, which include Bunnings, continue to grow strongly. Bunnings itself achieved a 13.4% increase in earnings, to A$701 million, on revenue growth of 10.9%.

Wesfarmers announced in mid-January that it would buy the Homebase DIY and furnishings stores from Home Retail for £340 million and inject £500 million into the business over the next three to five years, and Wesfarmers chief executive Richard Goyder said on Wednesday that Bunnings had “great momentum in both Australia and New Zealand” and that it “looked forward to taking on the ownership of Homebase this weekend.”

Wesfarmers intends to transform Homebase stores to the Bunnings brand. That will mean a large and aggressive new competitor for B&Q, currently the UK DIY market leader. Bunnings’ business model is a lot closer to B&Q’s. Its stores are in a similar, large warehouse style, focused on DIY. The home furnishing brands that are currently owned by Home Retail and sold in Homebase stores, like Habitat and Schrieber, aren’t included in the takeover, which serves to underline Wesfarmers’ DIY focus on its new baby.

However, the deal has been given a lukewarm initial reception by stock analysts in Australia. While few analysts either there or in the UK doubt that there was and remains scope to improve Homebase’s business – hitherto seen as too diffuse to compete with more focused DIY stores like B&Q and the huge furniture retailers like IKEA – the path of retailers’ ventures outside their home markets is littered with wreckage. Recall the failure of Tesco’s Fresh & Easy venture in the US, instigated at a time when it stood unchallenged at the peak of UK grocers.

That said, Wesfarmers is Australia’s largest private employer and has seen its shares climb about 6% since reporting its full-year results for the fiscal year 2015 in August. That’s a handy performance when you consider that Australia’s blue-chip S&P /ASX 200 index has lost nearly 10% over the same period.

Asked by financial news channel CNBC whether Wesfarmers might consider splitting its business given the mining sector’s travails, Goyder appeared to rule it out.

“We like being a conglomerate,” he said. “We like having a broad opportunity set and we think in the long run that is good for our shareholders.”

Source : David Cottle – News.markets
https://news.markets/shares/wesfarmers-results-will-bring-focus-on-bunnings-uk-move-11336/