Homebase owner reports latest results as integration continues

Wesfarmers 2016 full-year results were released in Perth, Australia on 24 August, with 7.5 per cent like-for-like increases in Homebase transactions, returns of £512m in four months, earnings of £0.5m and with £60m spent on transformation, and up to six Bunnings Warehouse UK stores planned for the next financial year.

The Bunnings and Coles owner bought Homebase for £340m in February.

Sales for the four months of ownership were £512 million and earnings (after restructuring and one-off repositioning costs) were £0.5 million ($1 million).  "These results were in line with acquisition plans," said Wesfarmers.

"Trading across the early months of ownership has been steady, a good result given disruption from a number of essential change and repositioning activities associated with starting to reshape the Homebase business and extracting it from the linkages to its former owner.

"Good progress is being made on rapidly implementing new trading strategies. The core ranges on offer at Homebase are being quickly reshaped to focus solely on the home improvement and garden market.  Wider product choices and deeper stock holdings are being established, with assistance via existing Bunnings relationships with the world’s leading suppliers and by leveraging direct sourcing capabilities. Over £60 million ($115 million) in inventory investment has been made to support this work.

"New marketing, pricing and operational strategies have also been implemented as part of this work.  Good store team engagement has supported the initiatives associated with the new ownership approach. Pleasingly, on a like-for-like trading basis for the period from completion to the end of June, customer participation (as measured by transactions) has increased by 7.5 per cent.

"Transition, separation and integration activity has been well advanced. A major restructure of the support team has been completed and a rebuild of the core business model replicating and leveraging the BANZ business model has commenced. Restructuring and one-off repositioning costs of £13 million have been expensed in this financial period.

"The new leadership team is now well established and they are supported by a specific BUKI Advisory Board that has been established to provide additional strategic guidance and essential UK market insight."

Bunnings chief executive officer John Gillam said repositioning of Homebase is "well underway", adding on that the trial stores "proof of concept is a critical step" and that Homebase had a "poor and confusing offer", but "the offer is now very firmly focused on the home improvement and garden market".

He said new trading strategies have been implemented; merchandising, pricing, marketing and operations have been reshaped with a home improvement and garden market focus; a wider product choice and deeper stock holdings have been supported by £60 million inventory investment; there has been "pleasing team engagement, development investments"; "steady trading across initial four months of ownership"; "disruption from change agenda well managed"; "encouraging increase in underlying participation"; and a 7.5 per cent per cent increase in store transactions (like-for-like).
The EBIT result of £0.5m includes restructuring and one-off repositioning costs.
Gillam said Homebase's new leadership team led by Peter Davis was "well established" with a special purpose Advisory Board in place, transition, integration and separation activity "well advanced", "many transitional services already terminated", and preparation commenced for Bunnings Warehouse pilots with the expectation to open four to six pilot stores in financial year 2017.
"Successful pilots are a pre-cursor to further investment", while acquisition accounting is "largely complete" and goodwill is "in line with forecast".

Overall, for Wesfarmers, excluding poor performer Target, the conglomerate’s retail portfolio delivered growth in earnings before interest and tax of 7.5 per cent.

Bunnings posted an 11.6 per cent lift in earnings to $1.214 billion on revenue growth of 21.4 per cent.

But Wesfarmers suffered an 83.3 per cent fall in its full-year profit to $407 million after more than $2 billion in impairments from its loss-making coal operations and from retailer Target.

Revenue from the Wesfarmers conglomerate rose 5.7 per cent to $66 billion for 2016, while earnings before interest and tax fell four per cent to $1.346 billion.

Wesfarmers managing director Richard Goyder said: "In a competitive environment, the group’s retail businesses continued to invest in customer value, service, stores and online as well as improved merchandise ranges to deliver long-term growth and improved returns.

"A highlight for the year was the Group’s acquisition of Homebase, the second largest home improvement and garden retailer in the United Kingdom and Ireland, which provides a platform for long-term value creation.

"Since the acquisition of Homebase, good progress has been made to reshape the business, with results in line with the acquisition plans. The Group is confident that the acquisition will deliver long-term value for shareholders."

Wesfarmers added: "Bunnings will continue to progress the establishment of its United Kingdom and Ireland business, with a focus on driving a stronger operating performance in Homebase while establishing pilot Bunnings Warehouse stores and infrastructure in line with a low-cost and high-capability operating model."

Net debt increased "mainly due to Homebase acquisition & increase in retail working capital".

Analyst Macquarie said: "Working capital impacted by Homebase. Working capital in FY16 decreased $236m (FY15 +$138m) driven by the retail divisions (Retail -$390m; Industrials +$154m). The retail movement was driven by investments to improve stock availability in Homebase and general investments across retail businesses."

Analyst DB said: "Wesfarmers has reported a result which was slightly ahead of expectations on an underlying basis. Generally the Australian retail businesses were in line but UK contributed less and the Industrial businesses in aggregate were slightly better."

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