The Co-operative Group has returned to profit following its biggest ever loss of £2.5bn, reported earlier this year.
In interim results for the 26 weeks to 5 July, the Group announced an operating profit of £43m (2013: £105m) and turnover of £5.1bn (2013: £5.3bn). Its 2013 £2.5bn loss was attributed to the disposal of the Co-operative Bank (£1.44bn) and the write-down of the 2009 acquisition of Somerfield (£226m).
“We took the tough decisions to re-shape our Group to ensure it is on a sustainable footing and the disposals of our pharmacy, farms and Sunwin Services businesses as part of this will repair our balance sheet,” said Richard Pennycook, who was confirmed as the permanent chief executive following six months as interim in the role.
Food generated the largest profit of £107m (2013: £117m). During the six months £74m was invested in the store estate, with 21 new stores opened and 50 stores refitted. There have also been increased sales across 780 new ranges, plus 2,500 lines have been revamped.
Funerals was the only other business division to turn in a profit of £35m (2013: £42m). Sales fell from £201m last year to £187m, in line with a lower national death rate.
General insurance reported a £7m loss (2013: £29m) and sales decreased to £189m (2013: £245m), which was blamed on the impact of increased claims following “adverse weather conditions” earlier this year and a competitive market for new business.
Legal services attributed a loss of £5m (2013: £3m) to a refocused strategy, which also saw sales decline to £13m (2013: £18m). A profit of £19m was also announced on discontinued operations, which is from the pharmacy division that is in the process of being sold to wholesaler Bestway.
“Our Group strategy is to build on our existing strengths as a convenience food retailer and to optimise the performance of our new Consumer Services Division, comprising of Funeralcare, General Insurance and Legal Services,” added Mr Pennycook. “We are now in a position to rebuild and restore the Group and can look to the future with greater confidence.
“At the same time, much remains to be done. These results clearly reflect an organisation in transition and show the scale of work necessary to restore the Group to full financial health. Underlying profitability in the business has been curtailed by the deliberate actions we are taking to implement our detailed rebuild plan and to face into the tough trading conditions prevailing in the markets in which we operate.”
The Group continues to support the Co-operative Bank. During the six months it reported a profit of £25m for its share in the Bank, of which it owns 20.2%. As part of the recapitalisation plan payments were made of £50m at the end of January and £100m in June with remaining £163m to be transferred before the end of 2014.
The Group’s pension scheme’s deficit has been reduced from £819m to £104m following a triennial valuation. The interim report said it has reached agreement on a revised funding plan with the trustees of the Pace scheme.
Annual deficit recovery contributions will increase by £5m to £25m – in addition a further £30m will be paid into Pace from the sale of pharmacy.
The Group’s debt remains at £1.4bn, as reported in the 2013 annual report, and, as such, interest payments have increased on the same period last year due to the additional debt following the capital hole at the Co-operative Bank.
But these payments will “significantly reduce” according to Mr Pennycook, who said recent sales of the pharmacy and farms businesses will be “less of a burden on profits as we go into 2015”.
Following those sales, as well as the recently announced Sunwin, the Group said it expects its overall annual operating profit to fall by £45m, but there is set to be reduction in its borrowing forecast for full year with total proceeds adding up to £910m
Farms has been sold to Wellcome Trust for £249m, which will leave a disposal profit of £110m. The £620m pharmacy deal with Bestway Group is expected to be completed in October, which will give a profit of £70m on the transaction. The Sunwin sale, which announced on 2 September, will give a profit of approximately £25m on the £41.5m sale.
Mr Pennycook also provided an update on the Group’s cost-cutting exercise. He said: “One of the targets of our new Group strategy announced in May is to reduce our corporate cost base. The Group has been working hard in achieving this with corporate costs being reduced from £78m last year to £70m this year. There is still much work to be done in this area.
“The Group is currently working on a new target operating model for the Group which will further improve efficiencies and processes.”