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Wesfarmers continues turnaround for Coles supermarket network

Published: 12:00 14 Jul 2009 AEST

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As part of the turnaround plan for Coles supermarket network, Wesfarmers announced the sale of 45 supermarkets and 8 Liquorland stores to independent grocery chain, FoodWorks, for $35 million. The sale effectively removes some of the smaller and presumably less profitable stores within the Coles network.

Coles Managing Director, Ian McLeod, said: “We’ll continue to focus on landing the right store formats in the right locations across Australia.”

The transaction is vendor financed over three years but Wesfarmers will book a profit on the sale by reversing part of a provision made in last year’s result. The vendor financing includes security and covenant provisions but does not guarantee the performance of the stores to the new owners.

Mr McLeod noted that the stores sold had an average size of 1,400 square metres compared to Coles average store size of 2,150 square metres. The smaller stores were more costly to supply and run and do not conform to the overall strategy of increasing the fresh food category which generally requires more space. The 45 stores sold represent approximately 4% of Coles total supermarket floor selling space.

Coles will reduce the overlap between some of its stores, which suggests that at least some of the $450 million of sales being transferred to Foodworks may come back to Coles through competition. Equally, though, Coles may lose some market share to those stores in future.

A summary of Coles’ supermarket network before and after the transaction is provided below:

Although Coles would not disclose figures, the sale will also release funds for investment in the store network that would otherwise have gone into these stores. This is perhaps one of the stronger arguments for the transaction. By not ‘wasting’ investment on less profitable and smaller stores, Coles can concentrate its effort on the larger and better placed stores within its network. This would, all other things being equal, produce a more profitable network.

About 16 of the stores sold were either Bi-Lo stores or Coles stores rebranded from the Bi-Lo format. Mr McLeod confirmed that Coles remains committed to the Bi-Lo format and the dual marketing of the main supermarket brand as well as Bi-Lo, which still represents approximately 4.5% of network sales.

The Coles ‘turnaround’ is still in its infancy with about four more years to go in the five year plan. So far, there has been a mixture of work accomplished from the very remedial (replacing deli scales, refrigeration, shopping trolleys) to the more complex (trialling new formats). As such, it is still quite early to be making judgments about the success or otherwise of the plan, but initiatives such as this announcement certainly count as a positive.

Please note that prices have recently been adjusted (by a factor of 0.940642) due to a rights issue. Fat Prophets initially recommended buying Wesfarmers around $15.05 in November 2008 (Fat 399). Our last review of this stock was in April (Fat 421).

From a charting perspective, since reaching a high of $24.05 in May, there has been a pause in the emerging upward trend. As evident on the daily chart, prices are currently forming a triangle consolidation pattern, marked by converging lines of resistance and support.

Triangles are a common continuation pattern, which suggests an eventual breakout in the direction of the prevailing trend. In the case of Wesfarmers, with an upward trend in place, this suggests further gains towards the $27 region over the coming weeks.

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