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Wesfarmers Ltd vs. Woolworths Limited: which one should you buy?

Wesfarmers Ltd (ASX: WES) is often described as a conglomerate and indeed it does have a number of ‘strings to its bow’, however at present it is very much first and foremost a retailer. While earnings in the resource-exposed divisions do bounce around, and at times can provide significantly higher contributions to the group at the interim result, the group’s retail businesses contributed 80% of total divisional earnings before interest and tax (EBIT).

The tough, focussed competitor

Meanwhile over at competitor Woolworths Limited (ASX: WOW) the game is 100% about retail. The major difference is that whereas Wesfarmers draws a significant portion of its retail earnings from its Bunnings franchise as well as its Coles’ supermarket division, Woolworths’ earnings are primarily just from its supermarket division.

There are many differences but the focus is supermarkets and hardware

  • For the 6-months to 31 December 2013, Coles Food and Liquor had revenue of $14,770 million and EBIT of $755 million, implying an EBIT margin of 5.1%.
  • Wesfarmers’ Bunnings business recorded revenue of $4,434 million and EBIT of $562 million for an EBIT margin of 12.8%.
  • Meanwhile for the half year, Woolworths Food and Liquor reported sales of $20,488 million and EBIT of $1,584 million, implying an EBIT margin of 7.7%.
  • Woolworths’ Home Improvement business boosted sales to $796 million, but with the loss also increasing to $64.4 million.

Foolish takeaway

Arguably Wesfarmers has the easier task at present. Its Coles business operates at a lower margin to Woolworths’ supermarket business – in time it should be able to close this gap. It also has a smaller revenue base which can make revenue growth easier to achieve.

On the flip side the juicy profits that Wesfarmers’ Bunnings business enjoys makes Woolworths move into the home improvement sector via Masters potentially very lucrative.

At the end of the day an investor should always demand a margin of safety before purchasing any stock and with both firm’s looking fully priced, now would not appear an ideal time to purchase either. On balance however, the lower risk objective of Coles to expand its profit margin – which will have the effect of boosting earnings by hundreds of millions of dollars – looks like a safer bet than Woolworths move to sink hundreds-of-millions of dollars to build market share in the uncharted territory of hardware.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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