What: Wesfarmers Ltd (ASX: WES) has announced its latest quarterly numbers and potentially the performance of its Coles division could lead to some shareholders questioning whether they should dump their stake in the company.
While the market's focus has largely been on the headwinds facing major competitors Woolworths Limited (ASX: WOW) and Metcash Limited (ASX: MTS) the latest numbers might have investors rethinking whether Wesfarmers should be added to the sin bin.
So What: Although Wesfarmers can fairly be described as a conglomerate, given the enormous size of the group's retailing operations it could also rightly be described as a retailer. With the group's retailing businesses the single largest contributor to group profits, the Coles, Bunnings, Officeworks, Kmart and Target businesses certainly warrant plenty of attention by shareholders and potential investors.
For the first quarter these five divisions reported year-on-year comparable store sales growth of 3.6% and 12.9% (the Coles division is split into sub categories of Food and Liquor and Convenience Stores excluding fuel), 8.2%, 6.5%, 8.6% and 3.2% respectively.
Standing alone, these results may appear reasonable however when compared with the quarterly growth rates achieved in the prior corresponding period there has arguably been a marked slowdown in the all-important Coles Food and Liquor business.
What now: While the competition is set to heat up for all of the entrenched supermarket operators as Aldi and Costco expand their Australian footprints, what should matter most of all for investors is where Wesfarmers' share price is trading compared with its fair value.
Based on Thomson Consensus Estimates, Wesfarmers is forecast to earn 229.2 cents per share this financial year. With the share price at $40.92 this implies a price-to-earnings ratio of 17.8x – that is below both the market multiple and the Consumer Staples multiple which arguably suggests shareholders would be better off continuing to hold rather than selling their shares in Wesfarmers.
