Wesfarmers expecting higher wages to impact FY20 earnings

Wesfarmers’ retail businesses have seen an improvement in sales growth in recent months compared to the second half of FY19 due to a modest improvement in retail conditions and signs of improving customer confidence.

However, with Bunnings, Officeworks, and Kmart Group all having signed new enterprise agreements in the last year, managing director Rob Scott noted the shift in staff pay could impact earnings.

“Our businesses face a number of cost headwings this year, largely as a result of higher personnel costs from new enterprise agreements, increased investment in digital and technology and the impact of a lower Australian dollar,” Scott said. 

“These pressures will be offset through productivity and sales growth benefits over time, but will have an impact on earnings growth in the near term.”

Retail chains trading up

Hardware and DIY chain Bunnings is trading well into FY20 and is benefiting from the diversity of its customer base, Scott said, with commercial and trade customers seeing strong growth. 

Scott also identified online as a large avenue for growth for the business, with its click-and-collect offer now available across all Australian stores.

Kmart Group saw a more challenging FY19,with EBIT falling 13.7 per cent to $450 million, though has also seen a pick-up in sales over the first few months of FY20. 

However, due to its new EBA, lower Australian dollar and higher levels of shrinkage, the group will face cost pressures.

According to Scott, the repositioning of Target is continuing, but the discount department store will continue to see weaker sales as the process evolves. 

“It will take some time to realise this transformation, which will see Target transition to a smaller and higher quality store network, with greater product and price differentiation relative to Kmart,” Scott said. 

The integration of Catch will strengthen the Kmart Group’s e-commerce capabilities, and should help position the department stores into the Christmas period.

Pushback on remuneration “frustrating”

Despite signs of improved trading, the business narrowly avoided a first strike against its remuneration report, with shareholders voicing their concerns about executive pay.

In total 21.45 per cent of shareholders voted against the report – slightly below the 25 per cent needed to deliver the first strike. 

Wesfarmers chairman Michael Chaney noted that executive remuneration was an “extremely frustrating issue”, and one that takes up a large amount of director time – largely to ensure the balance they find satisfies the often divergent demands of external stakeholders. 

“It is not in doubt that there is increasing unsease about executive remuneration – in the general community about salary levels, and in the professional community and amongst regulators about the structure of remuneration packages,” Chaney said. 

“[We] need to work hard to balance community and investor expectations with the need to reward our executives appropriately, retain their services and attract new talent to the organisation.”

The issue has grown more complex, Chaney argued, with the emergence of private equity and its ability to deliver high rewards outside of the public view. 

Chaney said that despite having decreased remuneration for key executives by 26 per cent and delivering solid returns over the year the business would still see a large vote against the report – highlighting how difficult it is to keep all stakeholders happy. 

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