Wesfarmers’s Financial Report Case Study

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08/02/20 Finance Reference this

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Part A: Background and Introduction

Wesfarmers Limited is a consortium organization located in Australia with head office in Perth. It started in 1914 as a Western Australia farmers’ cooperative to give services and goods to the farmers. It has now grown to be one of the colossal organizations in Australia. It has a diverse business performance which include: supermarkets, liquor, hotels and convenience stores, department stores, office supplies, and industrial and safety products. It is also one of the largest employers and has a shareholder base of approximately 217,000 and 495,000 respectively (Wesfarmers.com.au, 2018). Their top competitors are Kroger, NKD, Ermes Department Stores and QKL stores. Wesfarmers core goal is to deliver suitable returns to stockholders via financial discipline and extraordinary management of its enlarged portfolio of businesses.

The core values of Wesfarmers are probity, transparency, accountability, and entrepreneurial quintessence. The Wesfarmers Way, together with the Code of Conduct and other policies, guide the behavior of everyone who works at Wesfarmers as they strive to achieve their primary objective. The Board and senior executives of the Group strive to ensure that their own actions and decisions are consistent with Wesfarmers’ core values.

 

Wesfarmers annual report

According to its financial reports, the full-year profit has jumped 58 percent to 1.2 billion off the back of the failed Bunnings UK and Ireland foray and the grappling Target department store chain. The company reported worsening if $1.4 billion related to Bunning, a $300 million write-down in target and $123 million profit out of their Curragh mine (Wesfarmers.com.au, 2018). In a statement, the managing director Rob Scott said that the three core priorities for the year were to address the areas of poor performance, reposition the portfolio and strive toward opportunities for growth.

 

Managing director’s report.

Additionally, Rob Scott, the managing director, the report showed how the company had made a significant profit improvement in the 2018 financial year. This was possible due to the changes made and those in progress have been led by a steady dedication to their core principles to give decent returns to the shareholders by providing long-term values to the stakeholders, customers, suppliers and the communities they operate in. Their industrial branch also did well to bring strong returns. 9 billion dollars was paid to the team members in salaries and wages (Wesfarmers.com.au, 2018). Wesfarmers also made a social contribution of 148 billion dollars directly and through the customers and team members. Wesfarmers is also one of the largest employers in the private sector with 217,000 team members. Wesfarmers has better days coming, this is according to their financial statements and their diverse branches which is expected to produce continued profit growth through investments and improving on their customer services offering even better products. Wesfarmers will retain a 15% shareholding with Coles and invest in flybys. This venture will pave way opportunities to better leverage data and digital capabilities for the benefit of customers.

 

Auditors Report

EY auditors audited the financial report of Wesfarmers Limited and its branches which comprised of a consolidated balance sheet as of June 30, 2018, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, notes to the financial statements and the directors’ declaration. Wesfarmers met the requirements for annual report of the Act, ISA 1/AASB 101and was also in accordance with the Corporations Act 2001 (Bostock, 2012). This included; giving an honest and a fair view of the consolidated financial position of the group as at 30 June 2018 and of its consolidated financial performance for the year ended on that date; and complying with Australian Standards and Corporations Regulations 2001. The audit was conducted in line with the Australian Auditing Standards. The auditing firm was independent to the company and in accordance with the auditor independence requirements of the Corporation Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code.

 

Wesfarmers vs Woolworths

Wesfarmers is one of Australia’s largest diversified holding company. The market capitalization of Wesfarmers is greater than that of Woolworths, about $44 billion versus $30 billion in the 2014/2015 financial year. Woolworth is the biggest rival of Wesfarmers in the retail market. Woolworth produced a solid first half 2018 financial year, growing EBIT from its ongoing operations by 9.9% on the prior comparative period to $1.4 billion (Fool.com.au, 2019). Currently, Woolworth is enjoying a turnaround in fortunes, especially now that its core supermarket firm no longer needs to take heavy losses incurred from the company’s failed foray into the home hardware sector through its discounted Master brand.

Part B: Differences and Changes

The financial report on Wesfarmers showed some major differences between this year’s report and the prior year’s report. In order to perform an in-depth analysis of these reports, it is important to consider the use of Porte’s five forces to help and pinpoint the company’s economic characteristics (Lawson, 2014). These forces include; competitive rivalry, buyer power, supplier power, threat substitution and the threat of new entry (Wesfarmers wants Lynas for rare earth, 2019). These are crucial to helping an organization understand what forces can affect the profitability of the organization. Following the independent auditors report at Wesfarmers, we were able to identify that there was a major increase on the firm’s taxes after the company discontinued its operations of subsidiary company Bunnings UK and Ireland (BUKI). On the 31ST December 2017, the company paid an impairment tax of approximately 935 dollars which were related to the company brand name, stocks, deferred tax assets, and goodwill.

After the evaluation of the company’s discount rates, long term inflation and growth rate assumptions, the terminal growth rates and the forecast and the exchange assumptions that were carried out by the organization. The amount then rose to an astounding 1.6 billion dollars in the first half of the financial year this increase was caused by the discontinuation of the company’s operations in BUKI which led to impairment charges. Impairment charges can be agreed to as the writing off of insignificant goodwill (Wesfarmers wants Lynas for rare earth, 2019). While looking ta why the company made the move to halt BUKI’s operations we had to analyze whether or not the company had considered the impact of the tax and whether or not the company had acquired any external financial advice. Following further research, we were able to identify that the company was unable to predict the ever-changing dynamic of BUKI’s performance and they were, therefore, unable to predict the massive loss that they were facing.

While the discontinuation of BUKI led to massive losses to the point of ineffective disposal, the discont9inuation of the operations of another of its subsidiaries, Curragh led to an increase in its profit margin. This increase had yet to be realized in the previous year with the sale of the coal mine for 700milion through an agreement (Wesfarmers.com.au, 2019). This data as a collected from different sales and purchase agreements that were used in assessing the cost of the post-tax gain on disposal that was recorded during the financial years. This agreement additionally includes a value share mechanism which was linked to the metallurgical coal prices, the company was able to acquire profits after tax of about 250million dollars. This profits in addition to the initial’s sales amount were able to cushion the company from the losses it incurred in BUKI.

With accordance to the company’s five-year financial figures, we were able to see that the company’s income statement had dropped significantly from the previous year by a difference of 1, 167 dollars (Hatch, 2019). the financial performance of the company, however, rose from 25.0 in 2017 to 30.4 in 2018. Overall the stalk market capitalization of the company rose from 45, 490 to 55,966 which means that company, therefore, marking a massive improvement in the company’s performance (Wesfarmers.com.au, 2018). Market capitalization can be regarded as the value of the outstanding shares of a publicly traded company. While considering the market capitalization of Wesfarmers we can say that the company increased its net worth and achieved the highest net worth as compared to previous years. While it experienced a massive loss form the sale of BUKI, the company was able to recover all this through the sale of it cole mine.

After assessing the major differences that occurred on the company’s financial report, it is important to understand the reason as to why they made moves to sell both BUKI and Curragh.  These are the two major differences which even advocated for the rise of the company’s market capitalization. The Bunnings Warehouse Chain (BUKI) was one of Wesfarmers’ subsidiary company. The company acquired this chain for 705 million dollars in a bid to expand int other markets. Unfortunately, the company was unable to maintain the company as 1.7 billion of the shareholder values. Wesfarmers was forced to sell the company at the lowest price of 1.60 euros (Hatch, 2019). The company then further incurred losses on the taxes that they had to pay for the company therefore further aggravating the situation. In the case of Curragh, the company decides to make the sale in order to add value to them. While the two major changes that occurred were both positive and negative, it is clear to see that the company made this move in the best interest of its stakeholders. The sale of Bunnings was a damage control move while that o Curragh was extremely advantageous.

Part D: Conclusion

After studying the different reports on Wes Farmer, it is evident that while the company succeeds in some areas, it has occasionally failed. Following the director’s report, the company independent auditor, the organization has been able to abide by the environmental regulation and performances throughout Australia and any other countries that it operates in. Additionally, in recognizing the necessity for a higher standard of behavior the company directors have chosen follow the ASX recommendations. The independent auditor’s report assures us that the report was free of fraudulent activities from the financial report itself, we were able to see that the company was able to improve its market capitalization, therefore, increasing its net worth. However, following the major failure it had with the operation of BUKI, we saw the market share of stakeholder drop and there was a massive loss of 1.7 billion of its shareholder values.

References

  • Bostock, T. (2012). The Corporations Act 2001. Amicus Curiae, 2002(39).
  • Fool.com.au. (2019). Woolworths vs Wesfarmers | Motley Fool Australia.
  • Hatch, P. (2019). In for $705m, out for £1: Wesfarmers abandons UK Bunnings disaster. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/companies/wesfarmers-decides-to-pull-out-of-uk-bunnings-disaster-20180525-p4zhg4.html [Accessed 9 May 2019].al-mine—update.pdf?sfvrsn=0 [Accessed 9 May 2019].
  • Lawson, R. (2014). Measuring Company Quality. The Journal of Investing, 17(4), pp.38-55.
  • Wesfarmers wants Lynas for rare earths. (2019). C&EN Global Enterprise, 97(13), pp.18-18.
  • Wesfarmers.com.au. (2018). [online] Available at: https://www.wesfarmers.com.au/docs/default-source/reports/wes18-044-2018-annual-report.pdf?sfvrsn=4 [Accessed 9 May 2019].
  • Wesfarmers.com.au. (2019). [online] Available at: https://www.wesfarmers.com.au/docs/default-source/asx-announcements/sale-of-curragh-co .
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