Coles Myer released their much vaunted preliminary results yesterday, and as expected, Australia’s largest retailer announced an improved underlying net profit figure of $787 million. This represents an increase of 13.9% over the 2005 result. Sales increased only marginally by 3.3% to $36.6 billion, with most of the improvement coming from a slightly improved EBIT margin.

Target and Officeworks were once again the star performers with EBIT increasing by 16.2% and 14.4% respectively, while K-Mart lagged, with profit actually falling by 3% primarily on the back of a poor performance from its Tyre and Auto arm.

The presentation to shareholders was unashamedly aimed at fending off those pesky barbarians, in the form of KKR, Wal-Mart and god knows who else. A key initiative announced by CEO John Fletcher was the plan to shed 2,500 “support roles”. The question arises, if one third of Coles’s head office staff isn’t required, what on earth are they doing at the moment? Fletcher noted that the redundancies will save Coles Myer more than $300 million annually.

Shareholders would be justified in asking why it took an indicative bid from a private equity firm for Coles management to realise that there are 2,500 people (earning on average $120,000 per year) working in head office who aren’t much value for shareholders. (Of course, if those 2,500 souls are adding value, one would question the wisdom in sacking them and paying all those redundancies). Of course, the strategy must be correct, because it has been approved by the high-priced wunderkinds at McKinsey.

At another point in the presentation, Fletcher showed a graph comparing the total shareholder return received by Coles Myer shareholders to that received by Woolworths shareholders in recent years. The graph indicated that since 2001, Coles shareholders have received a 17.5% total return compared with only 14.5% with Woolworths (and 12.9% for the broader market). However, those figures indicate the folly of choosing data which best proves a point. For instance, if you were to opt for slightly different dates, say January 1999 until August 2006 (just before the KKR offer was made), the comparison would vastly differ. For example, between January 1999 and August 2006, Coles Myer shares increased in value by around 17%, compared with more than 230% for Woolworths.

In fairness to Fletcher, he certainly hasn’t done a bad job managing Coles. The performance of K-Mart, Officeworks and Target has been vastly improved and the $1.4 billion received for Myer was well above expectations. Rather, Fletcher’s team just hasn’t performed as well as other leading retailers like Woolworths or Tesco. That being said, Fletcher’s performance yesterday will at worst add a few dollars to the sale price of Coles Myer, and at a very unlikely best, allow him to keep his job.

Disclosure: The author has an economic interest in the performance of Coles Myer shares.

Peter Fray

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