Wesfarmers from soft food numbers

The numbers from Wesfarmers’ (WES) first quarter sales were certainly softer than expected on the Coles side, but relatively robust on the Kmart and Bunnings side.

Coles reported in the key food and liquor business a 4.4% jump in sales to $6.91 billion, with total sale up 4.9% to $8.91 billion. This was at the bottom end of guidance estimates with the medium consensus figure coming in at $8.9 billion. On a like-for-like basis Coles was up 3.4%; well short of the 4% growth expected by the market.

The soft read is explainable; WES suffered from stronger than expected food price deflation, dropping 2.5% as fresh produce slides. This is a credible answer as the consumer price index released on Wednesday saw a fairly hearty slide in the food prices over the last three months.

The silver lining from the Coles numbers is that sales per square metre is up 2.3% and has continued its recent trend, while rival Woolworths remains stagnant.

What is also pleasing is Kmart and Bunnings continue to go from strength to strength. Kmart saw a 4.6% improvement in sales, and management believes it is well positioned to take advantage of the Christmas sales. Bunnings saw sales up 10.3% and on a comparable sales basis 7.1% as the brand continues to cash in on the demand for DIY hardware.

With 80% of earnings coming from these three operations, the disappointment in Coles many be outweighed by the other two. However, the numbers from troubled brand Target many push the scales in the bears favour.

Target saw sales falling 6.1% in the first half of FY14. On a comparable basis it is only slightly better, down 5.2%. The troubled brand is struggling for market share and increased competition from international and local competitors is causing concerns. Having seen three department heads in two years, questions about a possible spin out will only get louder if Stuart Machin can’t deliver by April next year.

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