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What’s next for Wesfarmers?

Despite the steep rise over the last 12 months, which has seen the shares pack on 30%-plus, not all of the news coming out of Wesfarmers (ASX: WES) is good news.

The company is announcing back-office job cuts and a possible operational restructure at its struggling Target chain. This comes on the heels of an earnings downgrade for the chain, with earnings for the full year now expected to be between $140 million and $160 million versus EBIT of $244 million in the previous corresponding period.

Retail results and Target turnaround

While Wesfarmers’ business interests range from insurance to resources and hotels, the company’s results are primarily concentrated in retail. In addition to Target, Wesfarmers also operates Kmart and Bunnings stores, as well as its massive supermarket chain and primary revenue source, Coles.

Wesfarmers acquired the then-struggling supermarket chain in 2007, for some $20 billion. In its well executed turnaround, Wesfarmers has seen Coles sales (including liquor sales, as well as convenience store and petrol sales) rise from just under $17 billion in 2008 to top $34 billion in 2012, despite stiff competition from the other half of Australia’s supermarket duopoly, Woolworths (ASX: WOW).

To help with a turnaround now required at Target, Wesfarmers has dispatched Stuart Machin, recently head of store development and operations at Coles. As The Sydney Morning Herald has reported, “Mr Machin… helped resurrect Coles after Wesfarmers bought the underperforming supermarket business more than five years ago.”

Overseas acquisitions?

Wesfarmers may also look to make further acquisitions, including overseas acquisitions. Its large cash balance suggests such is possible, and chief executive Richard Goyder recently said at the G100 conference in Sydney that “Inevitably I think in the years ahead Wesfarmers will do more offshore… We will have a look and we will probably dip our toe in various places.”

Still, Wesfarmers path to future growth is not altogether clear, while the shares are trading for over 20 times earnings. Investors may want to wait for a significant pullback – or seek that magical combination of growth and steady dividends elsewhere.

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Motley Fool contributor Catherine Baab-Muguira has no financial interest in any company mentioned in this article.

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