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Australia Wesfarmers's profit resilient despite hardware's woes

By Byron Kaye and Niyati Shetty
A woman walks in the fruit and vegetables section at a Coles supermarket (main Wesfarmers brand) in Sydney

By Byron Kaye and Niyati Shetty

(Reuters) - Australian retail conglomerate Wesfarmers Ltd posted the slowest earnings growth in six years in its hardware unit but still met forecasts for overall annual profit, raising hopes it can withstand a spending slump thanks to diversification.

Wesfarmers's first annual earnings update since demerging from grocery chain Coles last year shows its biggest earner, home improvement chain Bunnings, is impacted by consumer sentiment but is still largely resilient to broader economic headwinds.

A sharp decline in home prices and tepid wage growth have discouraged consumer spending in Australia for non-essential items, hitting retailers in recent months.

Pre-tax profit from Bunnings grew 8% for the year to end-June, its slowest pace since 2013. Same-store sales growth halved from the previous year.

But overall net profit from continuing operations for Wesfarmers, which also has discount department stores Kmart and Target, still rose 13.5% to A$1.94 billion ($1.3 billion), in line with analyst forecasts, according to Refinitiv data.

"Obviously there was some weakness in residential housing but ... the Bunnings offer is very diverse," Managing Director Rob Scott told reporters on a call on Tuesday, noting Bunnings was ramping up online offerings.

"We feel that the operating environment is not too bad and there's plenty of opportunity to go after for Bunnings."

Wesfarmers shares fell as much as 3% but recovered to be up 1% by midsession, outpacing a broader market gain of 0.6%.

"It is slowing down, but probably a bit of a pause before it starts growing again," said Alan Kwan, senior portfolio manager at Australian Eagle Asset Management which holds Wesfarmers shares.

"Australians love to tinker on the weekends," he said, referring to home improvement activities, and added that by going online Bunnings was "finally getting dragged into the twentieth century".

Revenue from continuing Wesfarmers operations rose 4.3% to A$27.92 billion. The company declared a final dividend of A$0.78 per share, compared with A$1.20 last year.

Pre-tax profit from Kmart and Target fell to A$540 million from A$626 million, within the company's forecast range.


SHOPPING AROUND

In 2018, Wesfarmers underwent its biggest portfolio overhaul in a decade, having sold its auto business and coal assets, as well as quitting a disastrous foray into British hardware, to seek better returns elsewhere.

The company, which has built up a war chest after the revamp under Managing Director Scott, has been looking for growth prospects beyond the retail businesses that dominate its portfolio.

It has been eyeing takeover targets in 2019, buying online retailer Catch Group Ltd and bidding for lithium company Kidman Resources Ltd and rare earths miner Lynas Corp, which it abandoned last week.

"I wouldn't be anticipating a major focus on M&A at the moment," Scott told reporters. "Our organisation is mostly investing in our businesses."

($1 = A$1.48)


(Reporting by Byron Kaye in SYDNEY and Niyati Shetty in BENGALURU; Editing by Stephen Coates and Muralikumar Anantharaman)