Wesfarmers to Take Big Impairment Hit

SYDNEY—Wesfarmers Ltd. laid bare the potential pitfalls of owning assets as diverse as department stores and coal mines on Wednesday, saying it would take impairment charges of up to 2.3 billion Australian dollars (US$1.7 billion) after a slump in demand for key products.

The biggest write-down of up to A$1.3 billion will be booked against its discount store Target, which sells everything from toasters to children's T-shirts, but has been hurt by the arrival of foreign brands such as Zara and H&M to Australia's main street in recent years.

Wesfarmers said it would also take a noncash impairment charge of up to A$850 million against its Curragh coal mine in eastern Australia's Queensland state, which supplies Asian steel mills and power plants but has been bloodied by slumping prices of the commodity.

Wesfarmers is Australia's biggest conglomerate with a market value of more than A$46 billion, and has long justified a strategy of owning a diverse range of assets on the grounds that it creates long-term value for shareholders and provides a hedge against swings in fortunes of individual businesses.

Its strategy, however, is increasingly unusual in global business where activist investors in companies have made 'conglomerate' a dirty word. In the U.S., pressure on companies has intensified to split up and concentrate on the most promising lines of business.

General Electric Co. has been dismantling its sprawling financial operations and smaller U.S. companies like Danaher Corp. and Johnson Controls Inc. have opted to break themselves up.

Wesfarmers owns Australia's biggest supermarket chain, Coles, and the Australian franchise of U.S. retailer Kmart. It also runs tire-replacement workshops, office supplies shops, fertilizer plants, protective equipment suppliers, along with stakes in a sawmill and an investment bank.

On Wednesday, Wesfarmers said it remained committed to both the coal-mining business and Target despite the magnitude of the write-downs which will reduce its earnings in the year through June, 2016.

"The decisions which we have outlined today reflect more difficult market conditions in both Target and Curragh, but we remain confident that operationally we have the right plans to improve future performances over time," Chief Executive Richard Goyder said.

Target has aggressively cut prices in a bid to attract shoppers back to its stores, but the business has continued to struggle. Last month, Wesfarmers said a probe into accounting irregularities at Target had found its first-half earnings to be overstated by A$21 million.

"Whilst Target has made operational progress in recent years, market competition and disruption has continued to accelerate," Mr. Goyder said.

Wesfarmers now expects Target to record an underlying A$50 million loss in the current financial year plus A$145 million of restructuring costs and provisions as management needs to offer discounts to shift surplus stock that didn't find favor with shoppers. Its problems have been compounded by unexpectedly warm autumn weather, particularly in eastern Australia, which has reduced demand for seasonal ranges like coats and hats.

In the mining industry, Wesfarmers has grappled with thermal coal prices tumbling by nearly a third over the past two years, as demand from China cooled and supplies increased from mines planned when prices were booming.

Wesfarmers' Curragh mine in Queensland's Bowen Basin produces around 8.5 million metric tons of coking and thermal coal annually, mostly for sale to Asia. A recent report by industry body the Queensland Resources Council indicated roughly one third of coal mines in Queensland are losing money.

Wesfarmers said its final dividend will be determined by the group's underlying profit, which excludes the impairment charges but includes the restructuring costs for Target.

Write to Rebecca Thurlow at [e-mail]

(END) Dow Jones Newswires

May 24, 2016 23:25 ET (03:25 GMT)

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