Wesfarmers Limited shares slammed on potential $2 billion losses

Credit: Target

The share price of investment and retail conglomerate Wesfarmers Ltd (ASX: WES) is down 2.2% to $41.04 in morning trade after the company revealed non-cash write-downs of $1.1 billion to $1.3 billion against the valuation of its discount Target superstore business.

It also announced non-cash impairments of $600 million to $850 million against the value of its Curragh coal business. The company commented that the value of the Curragh business remains sensitive to a coal price that could swing substantially in the future with scope for it to be revalued to the upside. The tough conditions for coal markets have been no secret for a long time now and the coal price is something Wesfarmers has little control over.

However, the poor performance of the Target business is a concern with the group now forecasting that Target will produce an earnings loss of around $50 million in the current financial year. Wesfarmers is also expecting to take restructuring costs and provisions of approximately $145 million as it invests in an attempt to execute a decisive turnaround for the Target business.

For investors the good news is that Wesfarmers’ Coles supermarkets business continues to deliver strong same-store sales growth, while its Bunnings home improvement business is performing superbly with a strong outlook based on a dominant competitive position.

Despite today’s news of some short-term pain, I would still prefer the long-term outlook for Wesfarmers over its struggling rival supermarket operator Woolworths Limited (ASX: WOW).

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

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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