The Wesfarmers Ltd (ASX: WES) share price is still significantly up after announcing that it would be splitting its Coles supermarket off into its own ASX-listed business.
Clearly, investors liked the news. But does that mean it's a buy today?
Over the past few months there have been reports that Wesfarmers management were essentially looking at divesting pretty much every business except Bunnings. There was a report that Kmart, Target and Officeworks were going to be bundled together. The leadership team were very close to listing Officeworks as its own ASX entity.
But, out of the blue, it turns out that Coles is the one to get the chop from the conglomerate. I've read the reasons why Wesfarmers is doing this, but I think the most important reason isn't being communicated.
I believe that the supermarkets are going to get into a price war again. Woolworths Limited (ASX: WOW), Aldi, Costco and a host of other competitors are all trying to gain market share. The main weapon of choice for this seems to be price, which reduces profit margins.
Wesfarmers doesn't want to take the hit that Coles needs to of reducing prices to remain competitive. It's likely that Coles' profit margins will decrease in time. After all, the Coles and Woolworths duopoly had some of the biggest profit margins in the world a few years ago.
After Coles is gone, Wesfarmers will still have an impressive array of businesses. Bunnings is clearly the key because it was the largest contributor of earnings before interest and tax (EBIT) in its latest report. Management will need to turn Bunnings UK & Ireland around quickly to avoid a Masters-like disaster.
Foolish takeaway
Ultimately, it's hard to say if Wesfarmers is a buy today. There are too many moving parts and it's uncertain what the future Wesfarmers business will look like. Management said that Wesfarmers will pursue acquisition targets in the future, but it's difficult to know what sector those will be in. For now, I'd avoid Wesfarmers due to uncertainty surrounding the business.
