The share price of Wesfarmers Ltd (ASX: WES) has come under pressure this morning after its new chief executive officer Rob Scott poured cold water on expectations of a profit margin recovery at its Coles supermarket business in the current financial year.
The stock slipped 1% to $41.67 in late morning trade while the share price of arch rival Woolworths Limited (ASX: WOW) increased 0.3% to $25.50 and smaller grocery distributor Metcash Limited (ASX: MTS) traded flat at $2.75. Even the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) is managing to keep its head just above water.
Wesfarmer's new chief said he was "comfortable" with the 4% margins at Coles, reported the Australian Financial Review. This suggested that he was not expecting margins to rebound at the supermarket after it fell 150 basis points in the June half due to heavy discounting as Coles sort to claw back market share from Woolies and Aldi.
This would have been disappointing news as some analysts had been counting on margins recovering to around 4.9%.
The bright spot is that Scott isn't expecting margins to deteriorate much further with some investors fearing the worse given what happened in the UK when low cost competitors entered the market.
The difference is that the price gap between the major UK chains and Aldi was about 25% to 30% while the gap in Australia is only around 10%, according to Scott.
The one that will likely feel the most pain is Metcash as opposed to Coles or Woolies.
The other positive is the offshore expansion of Wesfarmer's Bunnings DIY warehouse. Scott said Bunnings in Ireland and the UK are performing well with consumers and margins improving at refurbished outlets.
He also isn't too worried about the underperforming Target discount chain that is also owned by Wesfarmers as he is comfortable with cannibalisation from Kmart as long as sales and earnings rose across both businesses.
There are things to like about what Scott said but I don't think anyone will think the fundamentals for Wesfarmers have improved with this latest update.
As I mentioned this week, the threat of Amazon.com is a "live" risk given the early success it's experienced with Whole Foods.
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