Wesfarmers Share Price Increases Despite 58.3% Profit Drop

Wesfarmers Limited’s [ASX:WES] share price increased sharply at the open today, even after the company revealed a $1.58 billion drop in total profit for 2018.

The group that owns Bunnings, Coles, Kmart, Target and Officeworks reported a profit of $1.19 billion, down from $2.77 billion in 2017.

Currently Wesfarmers shares are trading at $51.74, up 25.3% in the past 12 months.

Why has Wesfarmers’ profit slumped?

The downgrade in profit was due to $1.41 billion in discontinued operations and $300 million in write-downs. Primarily responsible is the failed Bunnings operations to expand into the UK and Ireland (BUKI), which has since been sold. Although, the struggling Target chain was to blame for the $300 million write-down.

In addition, while Coles’ revenue grew slightly by 0.4%, earnings tumbled by 6.8%, to $1.5 billion.

In contrast, Bunnings Australia and New Zealand (BANZ), department stores and Officeworks achieved very strong results — retail earnings increased by 5.2% throughout the year. BANZ earnings increased 12.7%, Department stores by 21.5% and Officeworks up 8.3% from the previous year.

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What is Wesfarmers doing about the falling profit?

The past year has seen Wesfarmers refocus its portfolio to deliver high returns for shareholders, including the discontinuation of the Bunnings expansion into the UK and Ireland and the sale of Kmart Tyre and Auto Service announced yesterday.

Rob Scott, Managing Director of Wesfarmers said:

The three key priorities for the year were to address areas of underperformance, reposition the portfolio and drive opportunities for growth, with good progress made against each of these,

The proposed demerger of Coles, and the divestments of Curragh and BUKI during the year, demonstrate a disciplined approach to capital allocation and portfolio management, and will reposition Wesfarmers for the next decade.

Despite the 58.3% drop in profit, the Wesfarmers group is committed to driving returns for shareholders, and are taking all the necessary steps to do so. Hence, the reason investors aren’t phased by the cut.

Ryan Clarkson-Ledward

For Money Morning

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Ryan Clarkson-Ledward is an Editor at Money Morning.

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