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How Brexit could hit Wesfarmers Ltd

Wesfarmers Ltd (ASX: WES) could face some issues with its foray into the home improvement business in the UK, following Britain’s decision to exit the European Union.

The biggest fear many market commentators have over Brexit is that the UK could see economic growth sink and the economy fall into a recession. A recession would be bad news for retailers, with consumers more intent on hanging onto their cash and less liberal in their spending.

Wesfarmers has just entered the UK Home improvement market through the acquisition of Homebase for £340 million (A$705 million) in January this year. Homebase is the second-largest home improvement chain in the UK. Wesfarmers says it plans to spend more than $1 billion refit, restructure and reposition the Homebase brand in the UK and Ireland, on top of that acquisition price.

Earlier this month Bank of America Merrill Lynch (BAML) analyst David Errington compared the move to Woolworths Limited (ASX: WOW) ill-fated entry into Australia’s home improvement sector with its Masters brand.

As we all now know, that was an utter failure and Woolworths is now selling off the bits of Masters that it can and closing down the rest.

Mr Errington’s fears are that Wesfarmers ploughs billions into turning around Homebase and it doesn’t work – detracting from the performance of Wesfarmers’ top guns – Coles and Bunnings.

A recession in Britain would dampen sales of hardware, tools and home improvement products just at the wrong time for Wesfarmers and Homebase. BAML’s economists are forecasting that the UK will fall into a recession with 2.5% comping off GDP.

However, it could take two years or more for Britain to finalise the exit from the European Union, and fears could be overdone. The exit doesn’t necessarily mean that Britain’s economy will fall into a recession.

Foolish takeaway

It might be a touch simplistic to assume that Homebase will follow in the steps of Masters. Wesfarmers’ management have so far proven adept at turning around a struggling Coles, and the performance of Bunnings in Australia suggests they know how to do ‘home improvement’.

Given the above, I wouldn’t be betting against Wesfarmers.

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Motley Fool writer/analyst Mike King owns shares in Wesfarmers and Woolworths. You can follow Mike on Twitter @TMFKinga

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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