Profit crash: Why Wesfarmers Ltd shares are tumbling today

Shares in Wesfarmers Ltd (ASX: WES) fell 1% at the open to $43 after the group reported a 7.7% decline in underlying Net Profit After Tax, and a whopping 83% fall in statutory Net Profit After Tax. Here’s what you need to know:

  • Revenues rose 5.7% to $65,981 million
  • Statutory Net Profit After Tax (“NPAT”) fell 83% to $407 million
  • Underlying NPAT fell 3.6% to $2,251 million
  • Earnings Per Share of 36 cents per share
  • Dividends per share of 186 cents per share (4.3% yield)
  • Strong segment performance in Supermarkets, Home Improvement, Kmart and Officeworks offset by poor performance at Target and in Resources
  • $2bn in writedowns of Target and Curragh businesses
  • All-important grocery Earnings Before Interest and Tax (EBIT) margins maintained at 4.7%

So What?

Investors will be relieved to learn that most of the decline in profits is due to ‘non cash’ changes in the value of assets, not an actual decrease in the cash that the company made. However the business did incur some additional restructuring costs thanks to Target and lower commodity prices.

Thankfully, the core Home Improvement and Grocery segments continue to evolve and management has committed to increasing their investment to these sectors because of the attractive returns on offer.

Despite strong ongoing competition from the likes of Woolworths Limited (ASX: WOW) and Metcash Limited (ASX: MTS), Wesfarmers’ grocery EBIT margins remained steady at 4.7%, suggesting that the group’s profitability hasn’t been hurt by its discounting practices. Readers can find a rather different opinion of the company by reading comments from its suppliers in the media, but that’s outside the scope of this article other than to say Wesfarmers has publicly committed to improving its supplier relationships.

Working capital demands increased as Wesfarmers funds improvements to its UK Homebase operations, but after six months it’s too early to tell how this acquisition will turn out. Petrol stations reported a 4.4% decline in volumes (comparable sales down 7.9%) sold, making this the third or fourth consecutive year of such declines.

Now What?

Wesfarmers is a complicated business and I recommend shareholders read at least the Outlook sector of the results presentation today to get a feel for how each of its constituent businesses are performing. Management continues to see long-term opportunities in the grocery, retail, and hardware spaces, with better value, better service, and improved ranges expected to deliver attractive returns over time.

Target will be subject to a fairly comprehensive reformation including the exit of a couple of categories as well as streamlining of its range and exiting unprofitable sales. Conditions in the resources and industrials sector are expected to remain challenging.

Despite the challenges, management remains focussed and the company’s balance sheet is very strong, with great cash generation. Dividends appear very reliable and Wesfarmers Ltd could be an attractive purchase today for a dividend investor.

Is Wesfarmers Ltd an '8 million dollar business'?  

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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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