A good profit, higher dividend, but sorry, no more rewards for Coles Myer’s long suffering shareholders, but there might be a cheque in the mail, soon, maybe even next year.
No matter which way you look at it Coles Myer has once again short-changed their long suffering shareholders. They did it at the halfway mark earlier this year and they have done it again.
The company and CEO John Fletcher would argue that they haven’t, that they are actively examining capital management proposals, but they won’t emerge until the end of the year at the earliest, and probably not until the interim next March.
They’ve stripped shareholders of the Solomon Lew-initiated discount card, in the name of boosting margins, replacing it with a growing family of financial products that seem designed to drive customer loyalty for little reward.
That, the company claims, will benefit bottom line earnings growth, but what’s been driving the bottom line is more the company getting its act together in the dysfunctional management teams, eliminating the empires and silos, and properly planning and executing the Coles Express petrol venture.
That is something Woolworths, which is noted for its good execution, has badly botched in its joint venture with Caltex. That well executed petrol strategy has helped drive the share price more than $2 higher in the past few months as the surge in sales in both petrol and in the supermarkets and basic liquor businesses outstripped a faltering Woolworths.
That in turn has lifted earnings in supermarkets to an all-time high, and offered the prospect of more to come with sales growth of 6.5% being recorded in the first eight weeks of 2004-2005. That is as strong, if not stronger than the sales growth Woolworths reported a few weeks ago for the early weeks of the new year.
Now directors have canned the dividend reinvestment program for the time being, slashed the dividend payout to 62 per cent from 80 per cent last year (when they desperately needed to bribe shareholders to keep them happy), and merely hinted as the possibility of capital management proposals late in the year.
CEO John Fletcher defended the sluggishness in the area as saying the they various proposals need to be thought through, discussed and put through the Tax Office, but what has Coles management and its advisers been doing since earlier this year when it became apparent that the company was generating more cash and paying down debt faster than previously thought.
Coles now has negative working capital, not as much as Woolworths, but it has reached the state of getting suppliers to effectively finance its inventory. That is in supermarkets and liquor where the stockturn is faster than in the discount chains, Officeworks and the still underperforming Myer/Megamart.
Having working capital means the company has been able, through the combination of better terms, fast-growing cash flow and tight stock control (and the impetus of the Coles Express petrol offer on turnover in the supermarkets), to lower its interest costs and capital needs, thus lowering the gearing.
That means Coles, despite a $900 million capital expenditure program in the current year, has a more robust balance sheet, better able to handle a generous capital return, if it wants to do it.
First off though it has to really seriously decide if it wants to be a player in the fitful battle for control of Australian Leisure and Hospitality.The most sensible thing Coles can do is to do a deal with Foster’s and pick up the 10% of ALH that’s a painful reminder to the liquor group of the float debacle last year.
That would enable Coles to bargain from some strength and to block the Woolworths-Bruce Matheson offer which remains cheap and unwanted by ALH management and many shareholders. But Coles can’t venture into a bidding war. That would chew up its capital and postpone capital management proposals, thereby upsetting shareholders.
For once, many would listen to whatever moans Solomon Lew might utter. So far the team led by John Fletcher has the runs on the board and has proven itself to shareholders. An adventure into ALH risks jeopardising that newly won trust.
The management team is basically stable, unlike Woolworths where Roger Corbett is remaining as CEO for at least the next two years to cover a problem in the succession planning. The only worries at Coles would be the loss of executives under Dawn Robertson’s reign in the Myer/Megamart business, which has still to deliver to its potential.
Megamart remains the big lossmaker in the frontline retail area. Its CEO has been ‘disappeared’ and a relaunch is on the cards with a hopefully more finely pitched offer. Coles made it clear that Megamart will be around for a while by saying that questions of ‘scale’ (ie the number of Megamart outlets) would be addressed later in the year.
Harvey Norman executive chairman, Gerry Harvey has bagged Coles Myer for keeping with Megamart and has urged the company to close it down. That should be incentive enough for Fletcher to keep persevering with Megamart.
For Harvey to squeal, even with his Coles Myer shareholder hat on, shows that Megamart is having some impact in the market of consumer electricals and furniture and homewares, where it is running up against Harvey Norman and its more upmarket chain, Domayne.
Every sale it closes makes Gerry Harvey’s life that much tougher, but Coles will have to get serious within the next year if its to stay in this segment with Megamart.