THE WALL STREET JOURNAL: Australia's Coles Myer Set To Unwrap Bumper FY04 Profit: “It now has some 600 Coles Express outlets via its alliance with Shell (RD), which analysts recognize has helped lure shoppers from competitors.” (ShellNews.net)
By RICHARD NOONAN
September 20, 2004 3:16 a.m.
Of DOW JONES NEWSWIRES
MELBOURNE -- Australia's largest retailer Coles Myer Ltd. (CML.AU) is expected to report a bumper annual profit on Wednesday, aided by strong consumer spending, cost cutting and a discount fuel offer.
An overhaul of the company's fresh food sections has also lured more customers to its supermarkets, while a surge in the Australian dollar will help underpin gains in profit margins at its once struggling department stores.
Due before the local market opens, Coles Myer is expected to post a net profit of A$593 million in the year ended July 25, according to an average forecast of five analysts surveyed by Dow Jones Newswires. That compares with A$429.5 million in the previous fiscal year ended July 27, 2003.
The result includes a A$24 million one-time interest gain from the repayment of debt and a A$40 million pretax charge mainly related to a supply chain revamp.
Analyst forecasts, which don't include the payment of preference share dividends, ranged from A$585 million to A$597 million.
Last month the company upgraded its guidance after better-than-expected sales growth across its main chains in the fourth quarter, raising investor confidence that a group-wide turnaround started by Chief Executive John Fletcher in 2001 is working.
It signaled a fiscal 2004 net profit of A$589 million.
Sales in the fiscal year just ended rose 19% to A$32.3 billion, outpacing archrival Woolworths Ltd. (WOW.AU) in terms of growth.
"We're expecting a pretty solid result," said Rob Patterson, a fund manager at Argo Investments, which owns Coles Myer shares.
"We would hope they will match or exceed that forecast," he added.
As part of Fletcher's five-year plan to revive profit margins, Coles Myer last year began offering customers who spend A$30 or more at its grocery and liquor stores a discount on fuel purchases.
It now has some 600 Coles Express outlets via its alliance with Shell (RD), which analysts recognize has helped lure shoppers from competitors.
In addition, it has been rolling out more of its high-margin fresh food and house brand offerings at its refurbished Coles and BiLo supermarkets. Analysts have noted better price perception and improved retail execution.
Coles Myer said last month the new Coles Express business will add to earnings this year, with some analysts forecasting a maiden earnings contribution of A$14 million-A$15 million before interest and tax.
It makes 56% of its sales and almost two-thirds of earnings from its food and liquor business, which includes the Liquorland, Vintage Cellars and Quaffers liquor outlets.
Analysts predict earnings before interest and tax from food and liquor to rise to at least A$670 million in the year, up from A$603 million.
Elsewhere, Coles Myer's major department stores - Kmart, Target and Myer - are expected to bolster earnings in the year, helped by booming economic and retail conditions. Australian consumer confidence has been hovering around 10-year highs, helped by low interest rates, income tax cuts and government handouts to families.
Capital Management In Focus
Apart from the results and outlook, analysts expect the company to update the market on its cost cutting program, which has promised savings of A$300 million in the year.
Fletcher may also comment on the prospects of a share buyback or special dividend in the near future.
Some analysts suggest the merchant is sitting on more than A$1 billion of cash and at least A$300 million in surplus franking, or tax-paid, credits.
UBS analyst Michael Peet said recently Coles Myer has "a lazy balance sheet," estimating it has the capacity to return A$1.5 billion to shareholders over the next three years via a share buyback and/or special dividend.
"Cash flow and the balance sheet could provide the biggest positive surprise in the upcoming result, which could support capital management initiatives," said Peet, who has a "buy" recommendation on the stock.
Daiwa analyst Shih Thin Wong agreed Coles Myer's strong cash flow generation in the fiscal second half will support some form of capital return but he doesn't expect the board to activate any return until at least 2005.
"The cash flow position should improve quite substantially in the second half," said Wong.
"I wouldn't discount (a capital return),...but my sense is it might be a bit soon to come. There's probably no compelling rush to enter a management program," he added.
Elsewhere, any comments on Coles Myer's interest in takeover target Australian Leisure & Hospitality Group Ltd. (ALH.AU) will also be closely monitored.
Coles Myer has so far refused to comment on ALH, sparking speculation it may be considering a bid or possibly a joint venture with the pubs and liquor shop owner.
Woolworths has made a hostile A$2.75-a-share bid for ALH, although the target has rejected the bid.
Coles Myer is "probably keeping an open file on that matter, but it's hard to see it wanting to be distracted on that," said Daiwa's Wong.
Even so, "the option is definitely there if Woolworths pulls out," he added.
Coles Myer has also promised to update the market on the future of its Megamart chain of electronics and furniture stores after a review of the underperforming business.
UBS' Peet expects the Megamart format to be dropped and stores to be rebadged with a new or existing brand.
Its shares closed down four cents, or 0.4%, at A$9.27 on Monday, while the benchmark S&P/ASX 200 index fell 0.1%. The stock has climbed 23% so far this year compared with a 13% rise in Woolworths stock.
-By Richard Noonan, Dow Jones Newswires;
61-3-9614-2664; richard.noonan@dowjones.com
-Edited by Graham Morgan