Australian retailing giant Coles Myer has announced net profit after tax of A$212.5m (US$112.25m) for the half year ended 27 January, 2002, a 9.5% decrease year on year. Sales increased 8% to A$13,279m in the same period.

CEO John Fletcher said: "The critical issue for shareholders was arresting the steep earnings decline in our General Merchandise and Apparel (GM&A) businesses that occurred in the six month period to July 2001.

"We have been particularly pleased with the early results of our re-build initiatives. Sales growth momentum has returned and, importantly, we have substantially reduced inventory levels in the three GM&A brands. In achieving this progress it has been necessary to re-invest in our service and pricing levels, which has impacted margins in the short term.

"We remain confident that our brands have clearly differentiated positions: Kmart as a low cost, discount department store with ranges for the entire family; Target with affordable, on-trend, high quality merchandise; and MGB as a value driven department store.

"While the turnaround is underway in GM&A we continue to build on our Food and Liquor strength. Food & Liquor's strong sales increase of 11% to A$7,995m was assisted by the successful acquisition of Franklins stores. In GM&A, where customers responded to improved ranges, service levels and price, sales increased by 4.9%.

Fletcher said: "The initial phase of Operation Right Now identified annualised cost savings of A$40m in FY2002, increasing to A$90m by end FY2004. It is now anticipated that the cost savings in FY2002 will be A$100m and these will predominantly be used to improve competitiveness. Early indications from the company wide review of areas including supply chain, shared services and OH&S, has identified additional annualised savings of A$210m by the end of FY2004. A proportion of these cost savings will continue to be passed on to customers. Further updates will be provided as the review process progresses through other areas of the company".

Directors have declared a fully franked interim dividend of 13.5 cents per share.

Food and Liquor

The Food & Liquor Group achieved EBIT of A$261.6m, with sales increasing by 11% to $7,995m. Alan Williams, COO - Food, Liquor and Logistics said: "Strong sales growth continues to drive group EBIT as we build market share with the smooth integration of our ex-Franklins stores.

"Our EBIT margin of 3.27% was, as expected, temporarily diluted by the supermarket and liquor acquisitions, which included store set-up costs, re-staffing and marketing. Competitive pressures, particularly in liquor, also restrained margins. Performance will continue to improve into the H2 as the acquisitions are bedded down and cost efficiencies come on stream.

"A further 17 ex-Franklins stores were secured in the Q2, bringing the total to 37. The additional acquisition cost was A$15m, with annualized sales of around A$270m, and expected capital refurbishment costs of A$32m. Trading commenced in 29 ex-Franklins stores during the half, and a further nine new supermarkets were opened during the period.

 "We will continue to refine and grow what is already a robust business, complemented by selective acquisitions," Williams said.

General Merchandise and Apparel

Warren Flick, COO, GM&A, said: "The GM&A Group reported EBIT of A$120.1m, and whilst this result is below the H1 last year, importantly, we have been able to turn around the significant earnings decline experienced in the H2 last year.

"Sales increased by 4.9% to A$5,137m during the same period, including acceleration to 6.9% sales growth in the Q2, which incorporates the important Christmas and clearance season. The reduction in EBIT is a reflection of our significant re-investment in staff and pricing as we progressively reposition the brands.

"Our summer clearance program is on plan. Total GM&A inventory levels at half year end were 17% lower than the prior period, with Target achieving the greatest improvement. A faster range turnover encourages customer traffic, supporting sales growth.

"Target's focus is now on the right positioning, operational efficiencies and delivering on-trend, high quality merchandise at very affordable prices," Flick said: "Myer Grace Bros reported EBIT of A$36.4m with sales increasing by 5.1% for the half and 6.9% for the Q2.

"As further initiatives under Operation Right Now feed through and range improvements continue, we expect a profitable result in the H2 of this year."

Flick added: "Kmart and Officeworks reported EBIT of A$43.7m. Kmart's market positioning requires it to be a low cost and low price operator. A deliberate decision was made to reduce prices to protect market share and this strategy has impacted margins in the short term.

"Customers have responded well to Kmart's new competitive price positioning, with Kmart and Officeworks' combined sales increasing by 6.7% over the half year, including 10% growth in the Q2. Profitability has improved considerably from the decline in the H2 2001," Flick said.

e.colesmyer

e.colesmyer offered the company valuable teachings in the evolution of new business channels, technologies and ideas. It is expected that once these direct selling concepts are proven, the brands will assume responsibility.

Q2 sales rose by 5.7%, ending the half at 0.5% growth. Excluding Myer Direct, e.colesmyer achieved 16.6% sales growth over the Q2. The loss for the half of these developing activities was reduced by 50%. Profitability has been improved during the period through increased cost efficiencies and the wind-down of Myer Direct. The closure costs of Myer Direct are expected to impact the H2 earnings.

Unallocated Costs

Unallocated costs rose by A$32.3m over the half to A$50m. The increase was primarily driven by executive change costs, consultants, project costs and higher shareholder expenses. Many of these costs were one-off in nature and total unallocated costs are expected to fall to $80-90m for full year 2003.

Balance sheet & cashflow

The balance sheet and cashflow strengthened considerably over the H1. Total inventory fell by 10% and gearing was further reduced to 20.4% (2001: 24.3%). Operating cashflow increased to A$652.1m; free cashflow rose to A$379.6m.

Outlook

"Much has been achieved in the short term and this result marks just the first phase in what we expect to be a two to three year turnaround story," Fletcher said.

We continue to anticipate FY2002 profit after tax to be around 20% higher than last year's underlying net profit result, subject to stable economic and market conditions.