Coles Myer Ltd., the Australian retailer that sold its department stores last week, said first- half profit rose 10 percent on gains at its supermarkets and Christmas sales at Target discount outlets.

Net income rose to A$484.5 million ($352 million), or 39 cents a share in the six months ended Jan. 29 from A$438.5 million, or 33 cents a year earlier, Melbourne-based Coles Myer said in a statement today. Sales at Australia's biggest retailer rose 4.3 percent to A$19.1 billion, the slowest pace in at least six years.

Chief Executive Officer John Fletcher, who last week agreed to sell his 106-year-old Myer chain, is trying to boost growth at his larger supermarket division by buying more liquor stores, putting in new managers and increasing marketing after losing market share to Roger Corbett's Woolworths Ltd. Fletcher today announced a new management structure at his supermarkets and liquor stores.

``Coles Myer's earnings for the first-half of fiscal 2006 were higher than the whole of 2003, indicating just how far the group has come,'' Fletcher said in the statement. ``The new structure will build capacity in the critical functions of supermarkets merchandise and marketing.''

Hani Zayadi will retire in August as head of food & liquor with supermarkets head Gerry Masters to also leave the company. In their place, Peter Scott will become head of supermarkets merchandise, Peter Merritt will head supermarket operations and Mick McMahon will lead the company's liquor operations.

Reporting to Fletcher

All three positions will report directly to Fletcher, making him the fourth person directly responsible for the company's biggest business in less than three years. First-half profit was expected to rise to A$442.9 million, according to the median estimate of six analysts surveyed by Bloomberg.

Fletcher said full-year net income would rise to A$785 million. The forecast excludes an expected A$700 million gain on selling the Myer stores. Coles Myer shares fell 1.1 percent on Friday to A$10.36 and have gained 1.5 percent this year. Woolworths shares have gained 14 percent. Food and liquor earnings before interest and tax rose 8.8 percent to A$397.3 million.

Coles Myer's supermarket profit margin, which measures earnings excluding restructure costs as a percentage of sales, was 4.05 percent in the half compared with 4.36 percent at Woolworths. This means that for every dollar spent at their stores, Corbett makes 7.7 percent more profit than Fletcher. If restructure costs are included, the margin at Coles Myer fell to 3.84 percent from 3.86 percent a year earlier.

'Key Issue'

``The key issue for Coles Myer is the capability of the group to generate sustainable growth in earnings from its existing businesses,'' David Errington, an analyst at Merrill Lynch & Co. in Melbourne, said in report before the results were released. ``Currently, there exists material risk that the existing businesses may go backwards in the coming 12 to 18 months,'' said Errington, who rates the stock ``sell.''

After failing to match Corbett's A$4 billion acquisition spree, Fletcher is starting to fight back with last month's agreement to buy Hedley Hotel Group for A$306 million to give him 36 pubs and 103 liquor stores in Queensland state.

Fletcher bought Hedley to get new sites for his 1st Choice Liquor Superstores, which are about four times larger than average outlets, as he seeks to build the chain up to 70 outlets nationally. Corbett plans to triple his Dan Murphy's chain to 100.

Gasoline Earnings

Earnings from Coles Myer's gasoline stations and convenience stores, which trade under the Shell brand, rose 48 percent to A$20.3 million, reflecting higher fuel prices. Myer earnings rose 6.1 percent to A$67.9 million on Christmas sales of clothing and cosmetics.

Texas Pacific Group's Asian buyout fund agreed March 13 to buy the 61-store Myer chain and its flagship Melbourne property for A$1.4 billion as it seeks to turn around a business which lags smaller rival David Jones Ltd. in sales growth, earnings and profit margins.

The Target discount stores, which mainly sell house-branded clothes and home-furnishings, increased earnings 27 percent to A$188.8 million on demand for clothing and shoes. Kmart earnings rose 2.4 percent to A$92.9 million. Coles Myer will pay a first-half dividend of 19.5 cents, up from 16.25 cents a year earlier.

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