British hardware hammers Australia's Wesfarmers

By Tom Westbrook

SYDNEY (Reuters) - Australia's biggest company by revenue, retail-to-coal giant Wesfarmers Ltd, posted sluggish first-quarter supermarket sales growth on Wednesday and said earnings from its newly-acquired British hardware stores had plunged.

Hit by hard-discounting rivals and a vegetable glut that trimmed produce margins, comparable food sales at Coles, Australia's No. 2 supermarket, grew near their slowest pace since Wesfarmers bought the grocer a decade ago.

In Britain and Ireland, sales slumped 17.5 percent at Homebase hardware stores, which Wesfarmers bought for A$705 million ($546 million) only last year in a bid to export its cash-cow Bunnings brand to Europe.

Wesfarmers shares slid as much as 3.2 percent to A$41.37, their biggest daily drop in a year, as the broader market edged higher.

"The fresh produce numbers were the weak link," said James McGlew, executive director of Perth stockbroker Argonaut Ltd, which owns Wesfarmers shares, adding the British hardware numbers were "ordinary".

Coles, Wesfarmers' largest division, is cutting prices to win market share from larger Woolworths Ltd amid intensifying competition from insurgent German discounter ALDI Inc. Similar forces have also rocked Britain's "Big Four" grocers.

Coles's margins were further squeezed by "significant" produce price deflation in the September quarter, mostly driven by a bumper vegetable-growing season.

Overall Coles sales, including liquor, rose 1.5 percent for the quarter.

BRITAIN TO "TAKE LONGER"

Once again, the star performer for Wesfarmers was Australian hardware business Bunnings, which posted 11.5 percent sales growth thanks to demand from commercial and private home-improvement markets.

While Wesfarmers did not give any profit figures on Wednesday, strong revenue growth at Bunnings usually augurs well for the conglomerate's bottom line. It will report interim profit in February.

But Wesfarmers' hopes of repeating its Bunnings success in Britain are on hold as the U.K. hardware business, including 244 Homebase stores not yet rebranded Bunnings, continued to struggle after posting an A$89 million loss in 2017.

"That's a real concern that suggests a lack of traction," CMC Markets chief strategist Michael McCarthy told Reuters.

Wesfarmers Managing Director Richard Goyder stood by the investment, while conceding it would "take longer than we might've hoped".

"We still consider the opportunity is a good one," he said.

Wesfarmers attributed falling hardware sales in Britain to large-scale clearance of discontinued stock and "difficult trading conditions", with retail sales weak across the board and wages stagnant.

($1 = 1.2920 Australian dollars)

(Additional reporting by Chris Thomas; Editing by Stephen Coates)