From the way retail shopping is written up in the news, you'd think no one is making good money at it. Sometimes you need to take a step back from the day-to-day events to see the bigger picture of what's happening with the big retailers.
Wesfarmers Ltd (ASX: WES), the $49 billion retail giant that operates Coles supermarkets, Bunnings Warehouse, Target and Kmart, as well as having coal, chemical and industrial businesses, is having to adapt to the changing landscape of business. Similar to its main rival Woolworths Limited (ASX: WOW), it has more price competition within a subdued economy, made more difficult by new market entrants like Aldi and Costco.
Still, Wesfarmers is meeting the challenges and has plans to expand business into where it sees future growth. Here's why shareholders should stick with their Wesfarmers shares.
Decent retail growth
In the retailer's interim report, net earnings were up 8.3% from continuing operations following the sale of its insurance businesses. Apart from Kmart, the other retail businesses generated operating earnings between 7% – 11% higher than a year before. The resources and industrial businesses were down, yet their proportion of total earnings is less than 10%.
Solid finances
The company's long-term debt is at a manageable level, only about two times annual net earnings. Wesfarmers also has a cash position of about $1.5 billion. As a low-cost retail operator with solid finances, it can weather the weak economy and still fund its future growth.
Poised for acquisition
Including the proceeds from the sale of its insurance businesses, Wesfarmers has a sizeable war chest for acquisitions. There has been speculation that the retailer is considering financial services companies that could support the level of revenue a large-cap company would require.
Lower interest rates flow through home improvement business
One of Wesfarmers' earnings powerhouses, Bunnings Warehouse, is benefiting from recent interest rate cuts as homeowners are increasing home improvements. A growing housing market boosts sales for paint, hardware, building supplies, etc.- all the kinds of things Bunnings is well known for. Woolworths' Masters DIY stores still hasn't been able to turn a profit, but Bunnings is holding its position as the hardware market leader. Its business earnings rose 10% in the first half.
Moving into financial services
The Australian previously reported that Coles applied for new trademark names such as Coles Finance and Coles Money. In addition to any acquisition of financial services companies, Wesfarmers can develop financial products and services for insurance and lending, using its extensive network of stores to reach consumers. This could become a strong income stream for the conglomerate.
Although recent growth for Wesfarmers has slowed, long-term investors have to look past the immediate effects of a weak economy and focus on where the company could be in 5-10 years. The stock story is improving in general, so it's better to stick with the stock. Investors can receive a healthy 4.5% fully franked yield and the stock is reasonably priced if they want to add to their positions.
