The beginning of a new year is a time when many people look to rebalance their portfolio. The act of rebalancing allows us to better position our portfolio for greater potential profits.
Here's why I'm holding on to Wesfarmers Ltd (ASX: WES) shares in my portfolio in 2019.
Wesfarmers recently divested Coles Group Ltd (ASX: COL) and sold its 40% stake in its Bengalla joint venture. The sales will allow Wesfarmers to focus on its higher growth areas and position itself for new acquisitions.
Wesfarmers still holds a sturdy group of retailers including Bunnings Warehouse, Officeworks, Kmart, and Target, even after divesting Coles.
In recent years, Bunnings Warehouse has been the star performer for Wesfarmers. In FY2018, year ended 30 June, Bunnings Warehouse achieved strong same-store sales growth of 8.9% and an increase in earnings before interest and tax (EBIT) of 12.7%. Wesfarmers' management is optimistic and expects Bunnings Warehouse to continue its growth in 2019.
Officeworks has achieved steady growth over the past decade and in FY2018, its EBIT grew by 8.3%. Officeworks has further plans to expand in FY2019 with six new stores, online enhancements, and a focus on its B2B segment.
Kmart and Target
Kmart and Target combined achieved EBIT growth of 21.5% in FY2018, the highest growth rate out of all of Wesfarmers' group of retailers. The EBIT growth for Kmart and Target was mainly driven by stronger sales growth for Kmart during the period.
Unfortunately, Wesfarmers' on Monday announced in the most recent trading update that comparable store sales for Kmart are likely to decline 0.6% in the half-year ending December 31, 2018. The sales growth was impacted by the weaker Christmas sales, planned exit of low margin DVDs, and weaker apparel sales, particularly in womenswear.
I believe Target, which is reinventing its business model to increase revenue, together with Kmart will certainly keep Wesfarmers' management on their toes.
Wesfarmers' share price is now trading at about 15 times estimated earnings for FY2019.
Bunnings, Kmart, Target, and Officeworks have established themselves firmly as household brands in Australia. Despite the recent setback for Kmart in sales, I believe it may just be a glitch before Kmart resumes its growth.
Overall, I believe that Wesfarmers has set itself up for a positive long-term growth outlook with its 'new-look' business portfolio. For long-term growth potential for my portfolio, I'm holding my Wesfarmers shares.