Coles Myer impressed with its latest profit but still managed to diddle shareholders as Solly Lew fired more blanks at the company which, along with Woolworths, now enjoys unprecedented market power. Shopaholic Solomon Corbett-Quinn reports.

Trust Solly Lew to miss the point in his latest carp against the current regime running Coles Myer.

Solly’s bleatings about the impact of the dollar’s rise on the latest CML profit, especially in the non-food areas, was valid… but he did not go on to say that the competition was benefitting as well (and its not just Woolies and David Jones that are benefitting), but the smaller non-food groups, such as Noni B and Millers: and yes, Solly’s own private interests such as Witchery and Nine West would also be creeamin’ it from the dollar’s rise. He knows better and the criticism was just petty point scoring for the media.

But there’s a bigger point here and given his track record (Yannon for example) its typical how he missed it: Solly seems to have forgotten he’s a shareholder in Coles, just like hundreds of thousands of other Australians. And while the price surge on Thursday helped him ($20 mill in the first hour according to a less than impressed John Fletcher), Solly also gets dividends on those shares: and that’s where Fletcher, the board and management can be rightly attacked.

Yes the interim dividend was lifted but only by a miserly half a cent to 14 cents a share after earnings per share surged 10.5c a share to 26.9c according to the CML statement, thanks to the improvements wrought by Fletcher, the stronger topline (thanks to Shell petrol game), and yes, the positive impact of the stronger Aussie dollar.

That means payout has fallen sharply as a share of profit from more than 80 per cent last year ( which was depressed by write downs and the early impact of Fletcher’s operational reforms) to just over 52 per cent leaving it on a par with rival Woolies (which raised its interim a more generous three cents a share to 21c).

But now that the good times have rolled in, and with the discount card disappearing at the end of July, you would have thought Fletcher and chairman Rick Allert might have been in a more generous mood.

But no, somehow small shareholders will have to make do with a buyback offer to holders of 800 shares or less, and the new Source Mastercard and the petrol offer – not much of a deal.

The whole idea of getting rid of the discount card was to improve margins and give them to all shoppers at Coles Myer stores, not just shareholders. This now looks like a pea and thimble trick . Margins have either steadied or risen, but the benefits to shareholders remains undelivered.

With CML reducing short term debt to nothing in the half, the way is certainly open to a modest re-gearing of the balance sheet at the end of the year announcement in October with a more generous buyback or capital return.

The short balance sheet issued with the CML profit announcement showed the reatiler could easily afford to be generous. Cash on hand was a smidgeon over $1 billion and when this is netted off again debt, well the retailer is hardly geared at all.

Certainly the current buyback as outlined in Thursday’s profit announcement by Chairman Allert showed little understanding of a couple of things: why should shareholders be encouraged to sell when prospects for the company have very much turned for the better and those who have held on through the lean years should be encouraged to stay on for the pay off. Why would small shareholders think about selling their shares after trading on Thursday saw a 28c surge to well over $8 and closing in on the all time high set when Solly was still on the board.

Wouldn’t it be nice if Chairman Allert told us now, of any plans for a capital management procedure later this year. Any plan should not be more generous than the share buyback proposed this week for the holders of 800 or less shares between now and April. CML would probably reply that no plans are comtemplated for later in the year at this stage. Well, I know of several small shareholders who will be holding on. The $8 a share looks to have more upside in it over the next few months, especially with the momentum fading from Woolies in the market and there’s obviously plenty of room for a significant improvement in shareholder rewards in October, barring any stumbles by management. But that’s unlikely given the way Fletcher and his team have so far run things.

On the petrol offer there was a useful exposition by a research group last week of just how little impact the petrol offers of Coles and Woolies are having on shoppers. A company called MWE Consulting was reported in the Daily Telegraph as estimating that the average shoper would only gain $75 to $85 dollars a year from the offer by filling their tanks an average of 35 times a year.

Both CML and WOW report that consumers are making smaller purchases more often during the week at supermarkets and some liquor outlets, meaning that some visits would see less than the $30 qualifying amount needed for the petrol offer and many liquor outlets owned by the giants, are not included in the offer.

The CML result was notable for more the dramatic improvement in the overall balance sheet, especially the financing of inventory. Its achieving Woolies-like results, but at not quite at the Woolies’ level. For example Coles had negative working capital of almost $80 million, a big improvement on the positive working capital of a year earlier of $223 million – a $300 million improvement while overall funds employed fell by $480 million. This generates interest savings well over $30 million a year.

But perhaps the most impoprtant measure of a retailer’s retailing ability is stock turn: the amount of time a retailer takes to move stock through the system and into the shopping trolleys of consumers. All Coles Myer would say was that stock turn “improved” in the supermarkets and liquor, Kmart, Target Myer and Officeworks – but there were no figures.

There is far more transparency at Woolies where the results proudly showed a graphic ( as it does every result). Stock on Hands fell to 35.4 days in the December half, down 2.8 days. Woolies makes the point that stock turn has fallen 9 days since 2000, at a saving of $515 million in working capital.

Until CML comes clean with its figures stretching back to say, 2000, then we would have to say on the evidence presented so far, Woolies remains ahead – but the gap is narrowing.

And, by the way buried in the CML report is a nice dig at Solly. “Corporate costs fell by $7.7 million…assisted by lower annual general meeting expenses, and restructuring and project costs.”

Now we know the 2003 AGM was a much quieter affair than the now amusing one the year before. Remember how Solly strode from the meeting without voting! By keeping his head down Solly has been a positive impact on earnings, a lesson he should also take from his latest carping when he completely missed the point – as usual.

The final point of comparison between the big two retailers is working capital – both are in negative territory. Coles Myer has been on this trend for the past two to three years (helping drive earnings higher thanks to changes like the improvement in stock turn), meaning, in effect, that suppliers are effectively financing the balance sheets of the big two.

Seeing how the heart of both businesses are the supermarkets and liquor operations, all those big names in Australian food and liquor businesses are really a sort of banker to these two retail giants. Even companies with the clout of Fosters, Nestle and Lion Nathan. It’s really a case of do it our way or its the highway.

As a fairly experienced watcher of the local corporate scene, its hard to remember when two bitter rivals so completely dominated an industry to the point where they control its day to day financing to the benefit of themselves and their shareholders (and employees, I must add).

Its really quite an amazing situation and no wonder that both companies, but especially Woolies, are feared and regarded as the toughest operators in the country.

Peter Fray

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