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Executives

Richard Goyder - Managing Director

Terry Bowen - Group Finance Director

Analysts

Michael Simotas - Deutsche Bank

Craig Woolford - Citigroup

David Errington - Merrill Lynch

Andrew McLennan - Commonwealth Bank

Ben Gilbert - UBS

Phillip Kimber - Goldman Sachs

David Thomas - CLSA

David Cooke - Nomura

Shaun Cousins - J.P. Morgan

Grant Saligari - Credit Suisse

Tony Wilson - Evans & Partners

Wesfarmers Limited (OTCPK:WFAFF) F3Q 2013 Earnings Conference Call April 17, 2013 9:00 PM ET

Operator

Ladies and gentlemen, thank you for holding and welcome to the Wesfarmers quarterly retail sales briefing. Your lines will be muted during the briefing; however, you will have an opportunity to ask questions immediately afterwards and instructions will be provided on how to do this at that time.

This call is also being webcast live on the Wesfarmers website and can be accessed from the homepage of wesfarmers.com.au. I would now like to hand the call over to the Managing Director of Wesfarmers Limited, Mr. Richard Goyder. Thank you. Please go ahead.

Richard Goyder

Hello, good morning everyone and thanks for joining us for this third quarter retail sales results for 2013. I’m joined by Terry Bowen, our Group Finance Director.

Just before I talk retail, I just wanted to tell you where we’re at in relation to Cole. We haven’t as yet completed all customer processing settlements for the fourth quarter, so we are not in the position to release our processing outcomes. But I anticipate that we will release you both our production and processing releases sometime next week.

We’re trying to release Cole sales tonnage guidance and processing segments achieved for the fourth quarter, like you see a small increase on the third quarter, but we’ll get that information to you when its conformed probably next week.

What I plan to do is give a brief overview of our sales results and then we’ll leave plenty of time for any questions that you might have.

The group’s retail sales results for the quarter were pleasing. The Cole’s result was the highlight for the quarter with comparable food and liquor sales growth of 5.3% driven by good volume growth following further investments in price, particularly in grocery and the continued growth in fresh produce sales. The March quarter represents the 16th consecutive period of growth in comparable sales and sales density.

The Bunnings business achieved good growth in all major trading regions and key product categories. Total store stales increased 6.9% for the quarter and comparable store sales grew 4%.

Officeworks, despite continued challenging trade conditions achieved positive store and on-line sales growth in the quarter, reflective of its multi-channel strategy.

While both department stores delivered sales growth, the quarter was assisted but the Federal Government’s Schoolkids Bonus payments in January, a warm summer across Australia in the earlier timing of Easter. These factors had a positive impact on Target’s sales performance in particular.

Following strong sales performance in January, trading at Target progressively softened during the balance of the quarter. Target recorded total sales growth of 1% during the quarter with comparable sales of 1.9% above last year. Stronger apparel and toy sales offset continued difficult conditions in electrical and entertainment categories.

As previously announced, Stuart Machin the former Store Development and Operations Director for Coles was appointed Management Director for Target effective April 15.

Kmart’s total sales increased 3.6% for the quarter, with comparable sales growth, a growing 20%. Kmart’s continued investment and lowering prices on everyday family items, together with a strong focus on availability and in-store execution drives stronger transaction and volume growth.

Now I’ll talk through some of the divisional detail. Coles Food and Liquor; Coles recorded headline food and liquor sales for the quarter of $6.5 billion, up 6.6% on the previous corresponding period. Food and liquor sales were up 5.5% to $20.8 billion for the financial year-to-date.

Competitive food and liquor store sales increased to closing 5.3% in the third quarter taken year-to-date comparable growth of 4.3%, with comparable sales growth driven by strong volume growth. Coles recorded overall food and liquor price deflation of 1.3% in the third quarter, with price deflation of 1.7% recorded for the financial year-to-date.

The commitment to lowering prices continue during the quarter and customers benefited from the focus on quality fresh food and the improved shopping experience. Generally we saw the reinvigoration extension of the ‘Down Down’ campaign through the lowering of prices on hundreds of grocery lines with a vast majority of those lower prices funded by Coles. Customers continue to respond positively to the re-launched flybuys program and the Target offers that Coles is providing, which complements its broader suite of offers.

The fruit and vegetables category continue to experience double-digit competitive sales growth during the quarter that inflects the business’s commitment to locally grown and sourced produce, which continues to resonate well with customers.

A close collaboration with Australian farmers have proven the growth in locally sourced produce benefiting supplies with greater volumes and security of sales and customers through continued improvements in product quality and value.

The liquor business made progress during the quarter; however, its sales growth remained a drag on overall food and liquor sales growth. Improvement in product ranges and customer value were made in the period, but there is more to food.

Coles opened four new supermarkets and closed three during the quarter, taking the total number of supermarkets to 754. Coles also completed a further eight refurbishments, bringing the total number of supermarkets and the renewal format to 313 or 42% of the fleet. Coles opened six new liquor stores and closed seven during the quarter, taking the total number of liquor stores to 802.

On convenience, total Coles Express sales, including fuel for the third quarter were $1.9 billion, up 6% on the previous corresponding period. Total sales for the financial year-to-date increased 4.6% to $5.9 billion.

Comparative fuel volume increased to 3.1% in the third quarter and 2.3% in the year-to-date. Convenience store sales, excluding fuel sales, increased to 2.5% for the quarter and 0.9% in the year-to-date. Comparable store sales increased 0.5% in the third quarter and decreased 1.4% for the year-to-date.

Continued strong comparable fuel volume growth demonstrates continued consumer demand for quality fuel at competitive prices and ongoing growth in supermarket customer numbers.

Improvements in the convenience store offer were also made during the quarter and a good customer response was received to the extension made during the quarter of the Down Down campaign to milk and bread in Coles Express stores. Coles Express opened one site during the quarter bringing total store network to

635 sites.

Now turning to Home Improvement and Office Supplies. Total sales for Home Improvement for the quarter of $1.9 billion were 6.7% above the previous corresponding period. Total store sales for the quarter grew 6.9%, while store-on-store growth was

4%. For the financial year-to-date, total sales increased 6.1% to $5.9 billion. Total store sales grew 6.3% in the year-to-date, while store-on-store growth was 3.6%.

Sales growth for the quarter was achieved across all major trading regions and key product categories and built on a positive momentum in the business. The business continues to focus on providing better service, improving the customer offer, investing in the store network and lowering the cost of doing business.

During the quarter four smaller format stores were opened. A further 16 sites were under construction at the end of March, reflecting the volume and quality of store part line to the business that developed over recent years.

Now to Office Supplies, total sales for the quarter of $417 million were 0.5% above the previous corresponding period, with store sales increasing 0.8%. For the 2013 financial year-to-date, total sales increased 0.4% to $1.129 billion, while store sales increased 0.8%.

The ongoing development of Officeworks’ every channel offer, its strong online sales growth continued during the third quarter and reflects the continued growth in transactions in this channel as customers responded favorably to investments in online platforms.

Now turning to Target. Total sales of $699 million for the quarter were 1% above the previous corresponding period, with comparable store sales increasing 1.9%. A strong sales performance in January was achieved in the summer season apparel categories and toys. Later in the period high levels of heavily discounted clearance activity and the earlier timing of Easter contributed to sales growth.

Sales declines in electrical and entertainment categories continued during the quarter with sales of DVDs, interactive toys and CD’s in particular affected by ongoing deflation. Despite clearance activity late in the quarter, seasonal inventory levels remain higher than planned, with further clearance activity expected to affect trading results in the final quarter.

For the 2013 financial year-to-date, total sales have increased 1.1% to $2.8 billion, although comparable store sales decreased 0.9%. During the quarter Target closed three stores with a further three stores expected to be opened in the fourth quarter.

And finally to Kmart, total sales of $842 million for the quarter were 3.6% above the previous corresponding period, with comparable store sales increasing 3%. Kmart has now achieved 13 consecutive quarters of growth in transactions and units sold. For the 2013 financial year-to-date, total sales increased 3.6% to $3.2 billion with comparable store sales increasing 3%.

Sales growth achieved in the quarter was driven by continued improvements in everyday core ranges and also inventory of our availability, with growth recorded across K categories, except entertainment, which continues to decline. Consistently Kmart strategy low prices continue to drive volume during the quarter, with in-store execution and greater product availability also contributing to sales growth. Kmart Tyre and Auto opened one new store during the quarter.

In summery, the retail businesses delivered a pleasing performance during the quarter. Our retail businesses continue to invest in price, improve customer service and enhance merchandise office to deliver better value. Investments continue to be made to optimize our store networks to drive future growth.

And finally in regards to sales result reporting, from this point forward we will not be separately reporting second and fourth quarter sales. We will of course talk to sales performance in the half and full year results, but we think this transition is important to ensure that sales reporting post the completion of the half and full years is completed in context with commentary relating to all drivers of performance such as cost and cash flows.

Now, we’ll hand over to questions that Terry and I will be very happy to answer.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Michael Simotas whose calling from Deutsche Bank. Please ask your question.

Michael Simotas - Deutsche Bank

Good morning Richard and Terry. I just wanted to talk a little bit about the timing of Easter. You called out some benefit to the Target business from the early Easter. I just wanted to talk about the impact across the other retail divisions, particularly given the 12 week retail quarter ended one week before Easter.

Richard Goyder

Yes Michael, I’ll let Terry talk you through it.

Terry Bowen

Right. In terms of as you mentioned we’ve got different approaches in different businesses. So if we pick those businesses first of all that work on weekly calendars, which is Coles, Kmart and Target, obviously as you point out last year the comparative period was two weeks prior to Easter. This year it was only a week prior to Easter.

So in Target and Kmart we saw probably about 0.5% to 0.6% benefit in that change versus last year. In Coles it was smaller, more like 0.1%, 0.2%. Then you move into the other businesses, Bunnings in particular, which is on a calendar end and while it had an impact of about, without quantifying it maybe somewhere a little over 0.5%, there was more of an offset in that business, because last year you will have a look and see that we had the 29 January in trading in 2012 and obviously missed that day’s trading this year. So that lost day’s trading if you like, in both headline and comp more than offset any change in the Easter timing.

Michael Simotas - Deutsche Bank

Okay. So just to clarify that, the like-for-like number at Bunnings make no adjustment for the loss of the day in February and Easter was a modest benefit, but I think this is not withstanding the loss?

Terry Bowen

That’s correct. So Bunnings was marginally if you like it, through the loss of the day, but including the Easter adjustment.

Michael Simotas - Deutsche Bank

Okay, that’s very clear. Thank you.

Operator

The next question comes from the line of Craig Woolford calling from Citigroup, Sydney. Please ask your question.

Craig Woolford – Citigroup

Morning Richard, morning Terry.

Richard Goyder

Hey Craig.

Craig Woolford – Citigroup

Just wanted to ask about the inventory position at Target. I mean can you give a sense of how much excess it is, what kind of impact you expect it to have on the fourth quarter sales and perhaps if it will be a good sales quarter without the margin that you’d like.

And would you call out separately the inventory write-down there in your results or will it be in the actual just underlying performance?

Richard Goyder

Yes Craig, I mean I’ll kick off. Terry can add to it if you like. I think as we’ve disclosed inventory is about 16% above where it was last year. Of that more than half is in Target essentials, so we’re not worried about that. The balance is seasonal inventory and to-date we haven’t had any cold weather across the country really, so it’s winter product and we haven’t yet had any cold weather. So we need a good sharp burst of winter around the place and that will help.

If we don’t get it, like most other retails we’ll have to clear and if you do that you’re obviously clearing at lower prices than you’d otherwise like. Do you want to add anything, Terry?

Terry Bowen

Yes. I mean, late in the period we called out. We were obviously cleared for the summer, the remaining summer inventory. There’s a little bit of that left, but the issue looking forward will be more a winter issue I think as we move into the final quarter, as Richard said.

I think in terms of calling out separate adjustments for Target, I mean it’s too early to say. My sense is obviously we’ve had a bit of that and it’s unlikely we are going to quantify it too much. I think the result will be what it will be.

Stuart’s obviously new into the job and going to have a look at everything in relation to inventory in that business, as well as everything else going on in the business in this early period.

Craig Woolford – Citigroup

Right. So with the essentials, you said that the inventory for the essentials was a big part of that inventory increase. Just to be clear, you will be happy to hold onto that inventory if it doesn’t sell through?

Richard Goyder

Yes, that’s socks and jocks and yes, that’s…

Terry Bowen

Partly is improving the availability and the other thing we are seeing obviously is a bit more direct product. Some of it’s actually sitting on water Craig, so stock-in-transit is a reasonable percentage of the increase and that’s just an increase in the amounts of product that we’ve got now coming direct relative to on-shore.

Craig Woolford – Citigroup

Yes okay, but the inventory uplift, sorry, 16% more inventory is in dollars or in units?

Terry Bowen

Dollars.

Craig Woolford – Citigroup

Yes, so it will be much bigger in units if it’s more direct.

Terry Bowen

Yes, it would be fair to say that probably a bit bigger, yes.

Craig Woolford – Citigroup

Okay, thank you all.

Richard Goyder

Thanks Craig.

Operator

Your next question comes from the line of David Errington calling from Merrill Lynch. Please ask your question.

David Errington - Merrill Lynch

Richard and Terry, hi. I don’t want to ask if we’re on target, because I’m just wondering how you actually go into that position in the first place, because your sales have been cooked last year and I’m just surprised you’re sitting on that level of inventory, if you’ve got the right systems. But anyway I don’t want to ask the question on that or maybe I have…

Richard Goyder

I think you already have.

David Errington - Merrill Lynch

Yes, you’re going to get a response. My question is, there’s a lot of footprint activity, a lot of store activity. You’re still closing a lot of stores. And like the Bunnings, John mentioned that you are planning on 100 stores opening in the next four years and yet I’m just wondering how many are you planning on closing in that period to get it, because in my model I had 100 new stores rolling out.

When I’m looking at Liquor for example, you’re still closing a large number of stores. At Coles you’re still closing a large number of stores and when you go right through the network…

I suppose my question is, is this just kind of the ongoing, the cost of doing so. Is it costly to do this, because it just seems to be a lot of stores still being closed, even though you’re four or five years into the business?

Richard Goyder

Yes, thanks David. Let me just give you a quick response on the Target inventory side of things. One of the reasons there is more inventory in Target is some analysis we did, it indicated that we were missing out on some sales because of the lack of inventory and so a part of it is that (inaudible) Stuart is working through where we’re at it in terms of the season lines and so we’ll update you more on that in May, where Stuart will have the opportunity to update you more on that in May.

On the store activity, Terry might want to give a more detailed response in terms of numbers, but this will be ongoing. In other words, where we in any of our businesses get a better location, we’ll take the location and close stores that would be impacted if it doesn’t work for those stores to remain open.

I think you’re right to sort of point it out. I think it’s a bit more prominent this quarter than it normally would be, but it’s just a timing issue I think, but I think we’ve called out. We’ll have 2% to 3% store space opening in Coles. We have a very significant store opening program in Bunnings in the coming years and the vast majority of those stores are new warehouses and clearly the store openings will be much, much higher in number than the store closures, but we will continue to close stores, because it’s the right thing to do in the retail businesses.

Terry you have anything to add there?

Terry Bowen

The only thing I’d add to that Richard is on Liquor, David I think if there was a business you would call out, there’s still a lot more work to do in terms of optimizing the network of our Liquor business, which we’re obviously making some progress in. But that won’t be ongoing for a while I think.

I would imagine as I think the guidance we’ve given around Coles is as good as we can give and I would imagine you’d see Bunnings do a number of replacements, but in a sense, old kind of fashioned as it has done previously.

David Errington - Merrill Lynch

I’m glad you guys did such a great job following (Inaudible). So well done being the followers in that.

Richard Goyder

Thanks David.

David Errington - Merrill Lynch

Thanks Richard. Thanks Terry.

Operator

The next question comes from the line of Andrew McLennan calling from Commonwealth Bank. Please ask your question.

Andrew McLennan - Commonwealth Bank

Good morning. I just wanted to ask about the very strong quarterly sales that came through in Coles this quarter. You obviously mentioned in the text that it’s partly due to the fact that you’ve been reinvesting in price. I was just wondering if you could talk about the consumer’s response, whether or not the big sales growth actually followed where you were going harder on price and whether or not that’s going to make any impact to operating leverage that we should contemplate?

Richard Goyder

Yes. Well there’s no doubt consumers responded to the reinvigorated Down Down campaign Andrew in January and they’ve also I think responded really well to the improvement in the Fresh offer. The Fresh offer it’s a virtuous circle; the better our offer is, the more we sell, and the better it can be, because we’re getting better supply chain arrangements, so the product is even fresher when it comes into stores. So that becomes quite a virtuous circle. So I would say it’s both those factors.

We had strong growth in grocery and very strong growth in fresh and the Down Down really was around grocery and fresh has been strong promotions, but also a much better offer.

Andrew McLennan - Commonwealth Bank

So one trend that’s been taking place in various areas is that consumers have been buying more on promotions. So is that a trend that you’re continuing to see within Coles?

Terry Bowen

Our promotional participation was similar, so not discernibly different. I think the other two points that I’d call out in the result was obviously we called out that FlyBuys and the targeted stuff we’re doing around that is increasingly penetrative, so I think that’s helped. And the other thing we said is obviously liquor’s been a drag on this business and still was a drag, but it wasn’t a drag to the same degree that it has.

So the drag in the last quarter was about 1.2%. It about halved this period. Obviously we had a bit of a benefit from the New Year’s Day. The starting point including those New Year’s sales, but even including that the business showed improving in a period where food improved as well. So net-net encouraging signs for liquor.

Andrew McLennan - Commonwealth Bank

Okay, thank you.

Richard Goyder

Thanks Andrew.

Operator

Your next question comes from the line of Ben Gilbert who is calling from UBS, Sydney. Please ask your question.

Ben Gilbert - UBS

Good morning Richard and Terry. Just on Bunnings, I’m just looking at the difference between the comps and the space growths. So if I look, it looks like you’ve increased space by about 5%, 5.5%. The difference between the comp and the total is about 3%. I was just wondering if you could comment on how your seeing the performance of your new stores and also any impact from cannibalization and just whether we’ve still got some of that deflation impacting those headline numbers in this result.

Richard Goyder

Yes that, Ben there’s about 2% deflation. A fair bit of that is the investment in cost from Bunnings, so that’s the answer to that question.

In relation to how the stores are performing, I think we’ve said before we do very thorough evaluations of performance of new stores in our retail businesses, within 12 and 24 and 36 months after they open.

Usually in a number of our businesses it takes three years to get them up to speed, but Terry’s instituted a program over the last couple of years where we’re reviewing things after 12 months and we are seeing generally you always get some movement, but generally we’ve seeing performance in line or marginally better than our forecast, which is what we’d expect, because we’ve had fairly conservative assumptions into our evaluation, and typically the Bunnings stores do perform better than our projections.

Ben Gilbert - UBS

In terms of the cannibalizations, I know obviously some sites are going to have zero cannibalization, but is there a bit of a standard measure or weight for the level of cannibalization you see inside these 100 stores that are projected? Is it sort of 5% or 10% or is there a number or a figure for that?

Richard Goyder

Not that we could sort of call out that would help your modeling Ben, because our modeling is fairly sophisticated and it goes to a fair bit of demographic information that we pull into each of the store models that we do. And so we look at the demographics, we look at current and projected populations and when you look at catchment areas and traffic and you look at how traffic moves around stores and then you look at your parking capacity and those sort of things that all drives your outcomes.

But again, we certainly modeled store impacts when we do these stores. And John Gillam has recently had another look at how we model that, just to make sure we’re not kidding ourselves and the Bunnings Board actually recently reviewed how Bunnings models are usually quite sophisticated names in evaluating the new stores.

Ben Gilbert - UBS

Great. Thanks Rich.

Richard Goyder

Thanks.

Operator

Your next question comes from the line of Phillip Kimber calling from Goldman Sachs. Please ask your question.

Phillip Kimber - Goldman Sachs

Good day guys. A similar question, but on Coles. I think you said you have 42% in the new fleet. Is there a big difference in the sales growth between the new fleet stores and the old fleet stores and how much of a rolling impact is there? Are we in that sweet spot now where you really are getting a lot of growth coming out of that new store format?

Richard Goyder

We see Philip, the new stores tend to perform at the upper end of our – if you map the whole 750 odd stores they tend to perform at the top end of those stores as a general rule. Obviously from a profitability point of view, a lot of it’s driven by fresh and you do end up with some extra costs and so obviously sales is but one lens that you look through.

In terms of the way those stores mature, there’s no doubt we see a big kick the moment they reopen as a renewed store, but you do see some maturity going into subsequent years, but it obviously declines pretty significantly by the time you get to a third year and becomes more type fleet, averaged off a much higher base. So you should think of that. Certainly year one is a kick, year two still in front, but less and then by your year three you’re getting more normalized with the rest of the fleet.

Obviously one of the things we’ve said as we move now to 42% up the stores, when we were first doing the store openings or renewals, they were the only one and the first one in Perth was the first one in Perth, so they drew from a wider catchment. So as you put more and more of these on the floors, clearly people return to a more convenient store if they’ve got two that are basically very similar. So you do get some cannibalization of other stores amongst that mix as well.

Phillip Kimber - Goldman Sachs

Okay, that’s great. Thanks a lot.

Richard Goyder

Thanks Phil.

Operator

Your next question comes from the line of David Thomas calling from CLSA. Please ask your question.

David Thomas - CLSA

Thanks. Hi guys. Just a clarification first up if possible; it’s not actually a question.

Richard Goyder

That’s all right, we won’t count it as one Dave.

David Thomas - CLSA

That’s good. The store rollout that you were talking to in Coles or food and liquor was 2% space growth I believe for FY ‘13. Are you still on target given the sort of store numbers that we’ve seen opened to this point to achieve that?

Terry Bowen

Towards the bottom end of that range, yes, so…

David Thomas - CLSA

Okay. And then I guess my question, when you took this business over the food, the fruit and vegetable in particular on the fresh side was a part of the business that under performed massively. It’s obviously starting to rebalance and a very good quarter of growth was seen in the third quarter.

Are you at a point now where you feel that the basket across both your dry and fresh products are more into alignment with what you would think is a natural level or is there still a lot more readdressing of that part of the business to go?

Richard Goyder

Yes David, we think there’s still a fair way to go on fresh, and that the initiative that Coles announced last week on dairy and some of the things we’ve done in fresh areas like strawberries and other areas is part of us strengthening our engagement direct to producers, so that we are getting better, fresher, more innovative in some ways products into its business, so we think we’ve got a way to go.

It’s interesting, we’re now selling just on fresh produce, so this is not milk and meat. On fresh produce we’re selling $2.8 billion, so we’re buying $2.8 billion more from our producers than we were in 2008 and 96% of those are sourced from Australia and so.

So $2.8 billion is coming from Australian primary producers per annum more into Coles, which is something like 210,000 tons of product, additional that we are putting through the business, which is obviously resonating well with our customers and it’s showing the good work we’re doing actually with Australian primary produces.

David Thomas - CLSA

Thanks a lot.

Richard Goyder

Thanks.

Operator

And the next question comes from the line of David Cooke calling from Nomura at Sydney. Please ask your question.

David Cooke - Nomura

Hi guys. I just wanted to explore deflation if I can in both Coles and also Convenience. If I look at the rate of deflation, this quarter was half of the previous quarter. I wonder if you can give a feel as to where the Delta was on that and how much of it was removing the discounting of liquor that we saw a year ago.

And then on convenience, intrigued with the reduction in milk and bread prices that didn’t drive a better growth profile in like for like. So I’m just wondering if you can give us a bit more feel as to what happened there and how much of that was offset by deflation, increasing in convenience?

Richard Goyder

I’ll kick it off David and Terry might want to add. Just on overall deflation, the sort of deflation we’ve seen in fresh in previous quarters didn’t occur this last quarter. So the majority of the deflation in Coles was prices initiatives within the business. So that’s I think the key thing there.

On liquor it’s not really big enough to have any impact, but through the liquor business there was a marginal increase in sales and a slight inflation into the business, but not big enough to really impact the food and Liquor numbers in any way.

Terry do you want to talk about convenience?

Terry Bowen

Yes, on convenience the reductions in bread and milk were obviously significant as we’ve said in terms of a general cost. It drew enough volume to be successful we think. The broader issue in terms of like for like continues to be in the same areas, which is cigarette sales and mobile phone sales or top up mobile phone sales, which have continued to be difficult through that channel.

I think, I mean what we would point you to there is if you look on a relative basis, we might sell 0.5% comp, not a lot coming out of that business. But on a relative basis if you look at trend, that’s quite a step up and so I don’t know that I necessarily agree with you that it didn’t have a very positive impact based on where we were trading prior to putting through those Down Down reductions on bread and milk.

David Cooke - Nomura

Okay, thanks guys.

Richard Goyder

Thanks David.

Operator

The next question comes from the line of Shaun Cousins calling from J.P. Morgan. Please ask your question.

Shaun Cousins - J.P. Morgan

Thanks guys. Just a question in regards to trade in Bunnings. I think in your broader commentary, Richard you made the point that all categories were performing well and apologies if you’ve made this point, but I just want to get an understanding of how you trade business performance given that Woolworths are highlighting that as an area of weakness for banks and generally across the industry the trade area is a little challenged.

Richard Goyder

It was actually pretty good Shaun. So I think in the quarter our trade numbers were up 3.5%.

Terry Bowen

6.5%.

Richard Goyder

6.5% trade. Sorry, across the business and that was stronger in New Zealand than in Australia, but certainly in Australia it was up close to 4%. New Zealand was double digits.

Shaun Cousins - J.P. Morgan

So is there anything specific there that you’re doing that’s sort of driving that I mean and that it’s much more of a – it’s a different service and it’s a much more of a relationship gain than what your Bunnings warehouse business is.

Richard Goyder

I think the strategy of putting the separate trade centers in has been a good one and we’ve got this PowerPass card the Bunnings guys introduced a couple of years ago, which I think has worked well. There continues to be strong trade sales within our warehouse stores as well and a desk to deal with trade people, better access in and out of the stores for them to pick up product.

So there’s been a real focus from the bank’s team around trade in what has been a challenged market. I think the performance over the last few quarters in Bunnings has been pretty good actually.

Shaun Cousins - J.P. Morgan

The comps are pretty similar as well?

Terry Bowen

Yes. So within that market Shaun, I think the other thing to say is there’s no doubt I think Bunnings is capitalizing on some turmoil in some of its major competitors when you look at the commercial side of the business. So as you say, you’ve got to be set up. Well, retail versus commercial sales are quite different, you’ve got to be set up quite differently. You’ve got to know how to play in that space, so I think that none of that’s lost on our business.

Shaun Cousins - J.P. Morgan

All right, sorry, just to be clear. Richard you made the point that the trade center openings had a significant positive…

Richard Goyder

That’s right, yes.

Shaun Cousins - J.P. Morgan

So it helped it a bit. So the comps are pretty similar between what you did in retail or consumer and to the trade or there wasn’t much of a – just how the difference there was?

Richard Goyder

In Australia the comps would have been marginally less in trade.

Shaun Cousins - J.P. Morgan

Yes, that makes sense. Thanks.

Richard Goyder

There’s not a lot in it.

Shaun Cousins - J.P. Morgan

Not a lot. Fantastic, thanks.

Richard Goyder

Thanks Shaun.

Operator

The next question comes from the line of Grant Saligari calling from Credit Suisse in Melbourne. Please ask your question.

Grant Saligari - Credit Suisse

Thank you. Just quickly for me I guess. I’m interested in the electrical comments out of Target and Kmart, because obviously they’re quite at odds with what some of the other retailers have been indicating this quarter for electrical and I know Big W is also quite weak in that category. So I’m just wondering whether you think that’s just the product exposure that Target and Kmart have or whether it’s a deliberate space it reflects, the deliberate reallocation of floor space or what might be driving the disparity in performance?

Terry Bowen

Certainly there’s a bit of reallocation of floor space driving some of that performance. That’s depending on the store. It’s easier in some stores than others depending on where that category is located.

The rest of the answer and the main part is actually the product mix size. If you think about our electrical and entertainment business in those areas, it tends to be quite focused on DVD’s, CD’s and interactive games, those major categories and I think some of the performance that perhaps you’re seeing in other retailers, that’s not the biggest portion of their business. They’re more home appliance type products which we’ve typically kind of certainly down-weighted on it, not moved out of completely in some cases.

Grant Saligari - Credit Suisse

Okay, thanks for that.

Terry Bowen

Thanks Grant.

Operator

Your next question comes from the line of Tony Wilson calling from Evans & Partners. Please ask your question.

Tony Wilson - Evans & Partners

Richard, there was a question asked earlier on leveraging food and liquor and I appreciate there are a number of moving parts to the ultimate leverage that you can achieve out of that business, but you did state that lower prices in the business were largely funded by Coles. Am I reading too much into it or is there an indication there that maybe margins are just coming under a little bit of pressure in that business?

Richard Goyder

I mean Tony it’s always a balance on this and the strategy that we’ve had since we’ve acquired the business was to get price trust back from and value trust back from our customers and we’ve used price as a key lever to bring more people into the business to increase turnover, to improve the whole offer, particular fresh. And I guess as much as anything, we’re pointing out the fact that that’ll continue to be a strong strategy.

That’s really resonated well with the customers. We’ve got millions of more customers in our store each week. The business as I’ve said has now had 16 quarters of comp sales growth and we’ll manage margin through that.

But in this business particularly you could always go back to what the old Coles did, which was pull the margin lever and to get shorter term profit results, but we won’t do that. We’re going to keep really working hard on the offer for customers and we’ll stay the journey on value.

Tony Wilson - Evans & Partners

Is the prospect of getting greater efficiency out of supplies, has that largely run its course now?

Richard Goyder

A bit more efficiency to be got out of the supply chain per se. Some of that’s our own, some of that’s through the logistics side of things. There’s more to do on that front Tony. Some of that is through more direct relationships and the milk deal last week is a very good example of where that can work for both, us and the supplier I think.

And there’d be some instances where suppliers that haven’t invested in their business and haven’t invested in those innovative new manufacturing processes and carrying too much cost with that. They can actually still become more efficient like every business in this country. So there’s a way to go through the supply chain, yes.

Tony Wilson - Evans & Partners

Yes, okay thanks.

Operator

(Operator Instructions). The next question comes from the line of Ben Gilbert. Please ask your question.

Ben Gilbert - UBS

Good morning. Just one more from me. I just wanted to touch on the inventory across the other discretionary business in terms of Bunnings and Kmart and just how you’re seeing that, and presumably we should see some of these seasonal issues coming and impacting Kmart on the inventory side and I was wondering if you’ve got any concerns there at the moment?

Richard Goyder

Yes Ben, I’ll let Terry answer it, because I just apologize, there’s a bit of background noise here, so there’s a heck of a lot of construction going on outside the building which seems to be going through a heavy phase right as we started this call, so apologies if the background noise is getting in the way. But it’s all part of what’s going on over here at the moment. I’ll let Terry answer the question.

Terry Bowen

Ben on that in terms of inventory, I guess less seasonal type inventory in the other type of businesses across the group versus say Target so far less of an issue in terms of having total inventory holdings. In Kmart very similar to last year, so I’m not expecting any issues; and Bunnings, similar, albeit a few more stores obviously which plays out a bit. So if we saw this, we would place it in the other businesses. We’ve obviously given you a steer around Target.

Ben Gilbert - UBS

And that’s because it’s interesting, some of the feedback recently sort of suggested that trends might have slowed a little bit through March and sort of adjusting for the Easter benefits. Are you guys feeling there’s been any slowing out there? Are you still really comfortable with how you’re seeing the consumer at the moment?

Terry Bowen

I don’t think much has changed Ben. Frankly one of the problems with quarterly reporting is there’s so many different things going on at a particular time. We’ve called out Easter, we’ve called out timing around when we actually report the numbers and there’s a whole bunch of things going on. My sense is that not a lot has changed in where the consumer is at. I think the consumer’s cautious, very price conscious and looking for retailers to give good reasons why they’ll buy products from you.

Ben Gilbert - UBS

That’s great. Thanks Richard and Terry.

Operator

And the next question comes from the line of David Errington calling from Merrill Lynch. Please ask your question.

David Errington - Merrill Lynch

Rich and Terry, a quick follow up on petrol discounting. I noticed Woolworths matched your $0.08 blanket discount, which they said they wouldn’t do earlier on, but they seem to have gone back on that. But the one thing that I have done is check if you spend, I think it’s $4 in the store; you get an extra $0.04 off a liter of petrol, which means that their discount on petrol is more attractive than your discount on petrol, which is the first time you’ve been leading the discount charge, whereas now you’re actually a bit behind.

Given that you have signaled out in the past that convenience store sales in the petrol pumps, in the petrol stations has been an area of softness that you wanted to address, I’m surprised you didn’t react to that Woolworths move and I know it’s a micro-question and it’s probably a bit too detailed for this call, but it is a question that I’ve wanted to ask. Why? What the reasoning is behind not following Woolworths on that?

Richard Goyder

You talk from personal experience David, are you?

David Errington - Merrill Lynch

Yes, well I am actually. I mean I must admit it is pretty attractive where you can get your paper and all that for free and it’s pretty pathetic, but I know it does resonate when you spend an extra couple of dollars in the store, you get an whack in petrol discount. And it has been something that you have led in petrol discounting. I’m just surprised that you seem to be letting it go a little bit and that Woolworths is now leading the chart. It just did raise my eyebrows.

Richard Goyder

I’ll let the Finance Director take the question.

Terry Bowen

I think we went up. I mean we obviously have put various other add-on promotional deals through the FlyBuys scheme, in particular during the periods and other kind of docket-type deals from time-to-time, David. I think we weigh up everything in terms of where we’re going to put our promotional dollars. It’s not to say that we wouldn’t necessarily match that or lead that kind of promotion in the future, we just haven’t in this quarter.

I think if you look at fuel volumes in the quarter, relative fuel volumes and what we’ve reported relative to others, I think what it says at the moment certainly is that we haven’t seen any slowing of customer numbers and growth through the convenience.

David Errington - Merrill Lynch

They did narrow the gap, Terry. I mean they were running at negative 5% volume growth when you were 1% or 2% positive and I think that Woolies have just now flat to slightly positive and you’re about 3%. So the gap has narrowed in petrol volumes in this quarter.

Terry Bowen

I think there’s no doubt. Now we said on the last call that we felt that the petrol discounting we were running, the $0.18 for a period of time, they didn’t match. We said we thought that was beneficial for our business not only in the short term, but would be over a longer period of time. I think that’s why potentially there was a reaction and it’s not surprising given that you saw their trend pick up a bit. But I guess what I’m saying is if you look at relative trends, even with a like-to-like on that front, we still grew off a higher comp that we were coming off of previously.

So as I said and I’m not saying for a second we wouldn’t necessarily match that kind of offer in the future or lead that kind of offer. What I’m saying is in short periods of time, 13 weeks periods, you’re moving stuff around all the time and over this period of time we obviously felt that we spend money in other places more effectively and that’s just where it is really.

Richard Goyder

It just shows the competitions working David.

David Errington - Merrill Lynch

Yes, no, no fair answer and I suppose it hasn’t hurt your supermarket sales, so no, fair top.

Terry Bowen

Thanks.

Operator

Your next question comes from the line of David Cooke calling from Nomura Sydney. Please ask your question.

David Cooke - Nomura

Hi guys. I just have a quick clarification question. What was your fuel pricing in the quarter and how much was the change on PCP?

Richard Goyder

Average fuel price was up for the quarter maybe $0.02 David.

David Cooke - Nomura

So average, what about $1.47?

Richard Goyder

We were lower than that. We are typically a bit lower than the market average, so we were more around the $1.45 I think.

Terry Bowen

Interestingly, David I think it’s as high as it’s been for a while, so which is (inaudible) take into account when you think about consumer.

David Cooke - Nomura

Sure, thank you.

Operator

And the next question comes from the line of Michael Simotas calling from Deutsche Bank. Please ask your question.

Michael Simotas - Deutsche Bank

Hi guys, just a quick mechanical question. The difference between like-for-like sales and total sales growth in Target seemed to go the opposite way to what I would have expected, given period in-stores were the same, but the stores that were closed wouldn’t have been closed at the beginning of the period. Is there anything strange with timing or lay-by sales or anything in there?

Richard Goyder

There was a bit of lay-by impact in there, but the most of it was actually on a like-for-like basis for closed stores coming out, which obviously were performing poor.

Michael Simotas - Deutsche Bank

Okay, so if you closed the store that was performing poor, wouldn’t that have missed the like-for-like…

Richard Goyder

Sorry, the other way around.

Michael Simotas - Deutsche Bank

Like closing a store that was performing quite well?

Richard Goyder

Well, it depends what base it’s coming off of Michael.

Michael Simotas - Deutsche Bank

Okay, alright. Thanks.

Operator

And there are no further questions.

Richard Goyder

Alright, well thank you all very much. If you’ve got any follow up questions, Mark and Alex are in the office. Look forward to seeing you soon.

Operator

That concludes our conference for today. Thank you for participating. You may all now disconnect.

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