Wesfarmers share price sinks lower on weak Kmart sales

The Wesfarmers Ltd (ASX: WES) share price has sunk lower this morning following the release of an update on its portfolio management actions and trading during the first half.

At the time of writing the conglomerate’s shares are down 2% to $31.35.

What was in the Wesfarmers update?

Following the completion of a number of actions taken to reposition its portfolio and the completion of the Christmas trading period, Wesfarmers has provided a preliminary estimate of significant items expected in its first half results and an update on retail trading for the period.

According to the release, the first half results will include a number of significant pre-tax items relating to discontinued operations.

These include a $670 million to $680 million gain on the disposal of Bengalla, a $265 million to $275 million gain on the disposal of Kmart Tyres and Auto, a US$98 million gain on the disposal of its interest in Quadrant Energy, a $130 million to $150 million provision relating to supply chain modernisation for Coles Group Ltd (ASX: COL), and a $2.1 billion to $2.3 billion non-cash gain on the demerger of the supermarket business.

These actions have helped to reduce its net debt position from $3.6 billion at the end of June to $300 million at the end of December.

Trading update.

During the first half of FY 2019, management advised that its retail segments generally performed in line with expectations, except for its Department Store segment.

At its annual general meeting, management advised that the normally reliable Kmart business had seen its sales growth moderate. Unfortunately, this trend continued throughout the key November and December months.

As a result, during the first half sales increased just 1% (excluding the Kmart Tyres and Auto business) on the prior corresponding period. Comparable sales declined 0.6% during the period.

Management blamed the poor performance on the exit from low margin DVD category which accounts for approximately 1% of sales, weaker sales in womenswear, and moderated growth in everyday products.

Things were a little better for its Target business which saw total sales increase 0.2% and comparable sales lift 0.5%.

Overall, the moderation in sales growth in the Kmart business means that first half earnings before interest and tax for Department Stores is expected to be between $385 million and $400 million, excluding the gain on disposal of Kmart Tyres and Auto.

Managing director, Rob Scott, appeared to be pleased with the company’s performance during the half.

He said: “All of our businesses continue to deliver a compelling offer to their customers and Wesfarmers enters the new calendar year with a strong balance sheet and operating businesses well positioned for the future.”

Should you invest?

While Kmart’s performance was a touch disappointing, it is worth remembering that it was facing a tough comparable period which was made even harder due to the DVD category exit.

In light of this, I still believe Wesfarmers shares are a buy at these levels and feel it is a great option for investors ahead of rival Woolworths Group Ltd (ASX: WOW) for valuation reasons.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET. 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 Scott Phillips.

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