Is the Wesfarmers Ltd (ASX: WES) share price a buy? The conglomerate announced yesterday that it will be culling many Target stores across the country.
Wesfarmers is a diversified business with several different divisions. It runs Bunnings, Officeworks, Kmart, Target, Catch and other industrial businesses.
Target has been a disappointment for Wesfarmers for some time. It has tried to turn it around but this coronavirus period seems to have been the catalyst for Wesfarmers to decide to make a big change to Target. Investors didn’t seem to mind either way about the announcement either way, the Wesfarmers share price was essentially flat.
What was in the Wesfarmers announcement?
Wesfarmers said between 10 to 40 large Targets will be converted to Kmarts, subject to landlord support. “Approximately” 52 Target Country stores will change to small format Kmart stores. Around 10 to 25 large Target stores and the remaining 50 Target Country stores will be closed. The Target store support office will be significantly reduced.
Kmart Group will take a non-cash impairment of between $430 million to $480 million. The industrial and safety division will also take a non-cash impairment of approximately $300 million.
The FY20 will include a number of significant items. Both the negative ones I just mentioned and the gain of the sale of Coles Group Limited (ASX: COL) shares.
Time to buy Wesfarmers at this share price?
The two department stores of Kmart and particularly Target are struggling. But it’s important to remember that Bunnings, Officeworks and Catch are actually performing well during this period. If earnings hold up well then the Wesfarmers share price should be able to keep doing well too.
I think the key will be what Wesfarmers does with its large balance sheet. It’s positioned to be able to make one or more large acquisitions. This could be a great time to do it with some businesses being distressed. If Wesfarmers acquires well then it could be a buy, otherwise it might be wise to wait for another market selloff considering the Kmart Group weakness and restructuring.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. 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.