Wesfamers Share Price down 2.91% despite $3.2 Billion in One-Off Gains

In a trading update released this morning, Wesfarmers Limited [ASX:WES] said it expects to chalk up at least $3.2 billion in one-off gains from the demerger of Coles and other asset sales.

Despite the significant gains in the December half, Wesfarmers’ share price has taken a considerable hit this morning, down 3.26% to $30.92. A loss of $1.04.

The diversified business operator last year demerged supermarket giant Coles and sold several of its smaller assets including Bengalla, Kmart Tyre and Auto, and Quadrant Energy. The move comes as part of a strategic repositioning of the company’s portfolio.

Department stores to blame

Wesfarmers’ share price likely slid today upon an update from CEO Rob Scott. In the trading update, he said earnings before interest and tax for department stores were expected to fall to between $385 million and $400 million for the half-year ending December.

Trading over the Christmas period was notably poorer than previous years. A stark contrast to the company’s reported earnings of $415 million — its highest since 2010 — in the previous year.

Kmart’s total sales for the H2 2018 (excluding Kmart Tyre and Auto) rose by 1%, but same-store sales fell 0.6%. Compared with growth only a year ago of 5.4%.

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Another Wesfarmers retailer, Target, was a little more fortunate. Total sales rose 0.2% and same-store sales rose 0.5%, compared with a 6.5% decline in the H2 2017 period.

Slowing trade for retailers?

December has been tough on retailers. Kmart’s profit declines, along with profit warnings from Kathmandu and Costa Group, fuels fears of a disappointing Christmas period.

Morgan Stanley analysts, reported by the AFR, said channel checks indicated Christmas trading for non-food retailers was soft and retail foot traffic tanked during December.

However, according to the ABS, retail sales in November 2018 increased at their fastest pace in seven months on the back of online sales such as Black Friday and Cyber Monday.

Total turnover increased by 0.4% after seasonal adjustments. Non-food sales were even stronger, increasing by 0.6%, reflecting the impact of deep discounting on discretionary spending.

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The trend suggests that strong sales in November are impacting margins in December, as retailers are forced to discount prices to make budget.

Similar trends are also appearing in the US. While consumer sentiment is fine for the present, it appears it is the future they are uncertain about.

Despite low fuel prices and increasing median wages, traffic also slipped for US supermarkets and retailers.

Perhaps consumer optimism isn’t as high as forecasters expected for the Christmas period. Some retailers feel as if the economy has come to a ‘fork in the road’, and if wider macroeconomic issues are not fixed then we could be headed towards a recession.

A closer look at the outlook for Coles can be found here.

Regards,

Ryan Clarkson-Ledward,
For Money Morning

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