Wesfarmers Downgraded on Exposure to Amazon

Wesfarmers Ltd [ASX:WES] fell as much as 4.4% this morning to $40.73 per share.

What happened?

Investors are neglecting the retail industry in general. Declining sales and the threat of Amazon.com.au Inc. [NASDAQ:AMZN] was enough to scare many investors out of the sector.

And according to Morgan Stanley, Wesfarmers is vulnerable to Amazon’s aggressive competition.

As reported by The Australian Financial Review:

Wesfarmers’ retail businesses are more exposed to Amazon than category killers JB Hi-Fi and Super Retail Group, says Morgan Stanley, which has predicted that the conglomerate could lose $400 million in earnings to the online behemoth by 2026.

What now?

Remember what happened to mining shares in 2016? They went through the roof. Mining stocks were extremely depressed on negative sentiment. It was only a matter of time before commodity prices turned and the miners would follow.

Is the same happening for retailers?

At the moment, retailers have two problems. But both could easily turn out to be very minor.

The first is Aussie wages. If people aren’t earning, they cannot be spending. Take a look at the graph below. It shows the wage growth for both private and public sectors.

Source: ABS

Both have declined in the past four years.

The second problem is Amazon. The US retail giant is portrayed as a looming figure, ready to squash every Aussie retailer.

OK, so let’s address the first problem: wages. They have to increase in the future. If they don’t, then you better get used to sluggish inflation. The problem isn’t if wages increase, but when. It could be in two years, five years or even 10 years from now.

As for Amazon, it has been the resident retail bully in the past. But who’s to say it can do the same in Australia? While it might affect retailers’ profitability, I doubt it will drive the likes of Wesfarmers out of business.

Regards,

Härje Ronngard,

Junior Analyst, Money Morning

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