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Revealed: Why the Wesfarmers Ltd share price is struggling

Credit: Target

What: Shares in Wesfarmers Ltd (ASX: WES) fell 0.8% on Monday after the retail giant which owns a variety of leading businesses including Coles, Bunnings, Officeworks, Kmart and Target announced that there was indeed a supplier rebate arrangement which had affected reported financial results.

So What: Until now, investors have largely been reading reports in the Australian Financial Review with no official statement from Wesfarmers, bar last Friday’s announcement that Target’s MD had resigned.

In Monday’s ASX announcement titled: “Target Update – Supplier rebate arrangements investigation”, the company noted that the accounting treatment of a number of Target supplier arrangements had recently been brought to the group’s attention.

The crux of issue identified was:

“The collective effect of agreed rebates of $18.1 million for past activity and subsequent product cost increases negotiated in December with 31 overseas suppliers did not meet the Group’s accounting policies and operating standards. Additionally, a number of supply arrangements amounting to less than $3 million were found to not strictly comply with the Group’s accounting policies.”

Now What: The overhang from this unfortunate situation at Wesfarmers continues to depress the group’s share price with the stock down a further 0.8% in mid-morning trade on Tuesday despite the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) rallying.

With the accounting issue now out in the open, investors can reassess their forecasts for Wesfarmers’ full year results.

Ultimately, it’s highly likely that investors will conclude that the long-term earnings outlook for the group is largely unchanged which could make the current sell-off in the group’s shares a potential long-term buying opportunity.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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