Earnings quality - Coles

Elizabeth Knight in the Herald has a look at Coles' recent earnings announcement (you can find both the profit announcement and the media release on the ASX website here). The "underlying profit' (i.e. pro forma income) for Coles is just under $45m higher than their net profit. No surprise there. Here's how Elizabeth Knight describes them:

But here come the adjustments. Take off $34.5 million for accounting changes, adjust $55.9 million for ownership review costs, add another $23.9 million in advisory costs and $51.5 million in redundancy costs, then take out $53.5 million in property gains, then tax-effect it and, bingo, the end result is a profit 1 per cent down on last year. And this is not too far off the amount the company has indicated.

A more cynical analysis could come up with a result that was 16 per cent below last year, even after the adjustments.

Yep. That can happen. From the perspective of the Wesfarmers board, it's probably best for Coles to get as much 'bad news' out in the accounts now, so that WES can document improved performance going forward. Assuming that WES can find good managers, improving performance of the Coles stores shouldn't be beyond them!