The Wesfarmers Ltd (ASX: WES) share price is down 6% over September and down 26% in the year to date.
This is interesting because a huge part of the conglomerate's business is retail — where spending continues to increase despite dire predictions — and agriculture, which is a buoyant sector. It even owns an Aussie lithium project, and every investor on this planet knows that lithium is hot, hot, hot right now.
So, why aren't investors feeling the love for Wesfarmers?
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Macquarie says sell Wesfarmers shares
According to an article on Livewire, Macquarie analyst Ross Curran has a 12-month share price target of $43.80 on Wesfarmers. Right now, Wesfarmers is trading above that at $44.25 at the time of writing.
According to the article, "Wesfarmers revenues are skewed to 'mortgage belt' Australia, leaving it exposed to reduced consumer spending in the event of an economic slowdown".
Retail spending still okay despite high inflation
The Australian Bureau of Statistics (ABS) reported a 0.6% monthly increase in seasonally-adjusted retail trade figures yesterday.
That's good news for ASX retail shares, as everyone has been expecting high inflation to result in consumers cutting back on their spending, especially on discretionary items.
So far in 2022, retail spending has actually increased every single month, according to ABS data. Perhaps all that money saved during lockdowns is keeping spending rates steady for now?
Wesfarmers owns a bunch of retailers, including Bunnings, Kmart, Target, Officeworks, and Priceline.
The Australian Financial Review reported last week that even discretionary retail spending remains strong. According to Mastercard data, spending is up more than 25% on pre-pandemic levels.
While spending might be okay right now, we all know that inflation will start to bite eventually. And the first thing people will do is cut back on consumer spending — well before they think about selling assets.
And Wesfarmers CEO Rob Scott sees this as an opportunity.
Inflation an advantage for Wesfarmers, says CEO
In an article published in the AFR in February, Scott explained that consumers being more value-conscious was positive for Wesfarmers. This is because many of its retail outfits are known as discount shopping destinations, such as Kmart, Target, and Priceline.
Scott said:
Often when inflationary pressure hits, companies ask themselves the question: 'How much can they pass on to customers?' And on some occasions they do get greedy and try to pass on even more and capture more margin.
We take the opposite approach. We say: 'How can we further differentiate on price?'
We do operate in a competitive market and in times when customers are more focused on price and working harder to balance their budgets, we want to be there to help them. And our scale and unique merchandising capabilities gives us the opportunity to mitigate costs in ways that others may find more difficult.
Wesfarmers director buys more shares
One investor taking advantage of the lower Wesfarmers share price is non-executive director Sir Bill English.
On 2 September, English bought an additional 1,130 shares on-market for an average price of $47.05 per share.
This is always a good sign. No one knows a business better than its insiders. You wouldn't think they'd be tipping their own money into the company if they weren't confident about its prospects.
What do other market watchers think?
Top broker Morgans says Wesfarmers has a retail portfolio that is "one of the highest quality … in Australia". It has an add rating and a $55.60 price target on Wesfarmers shares, as my Fool friend James reported last week.
Seneca Financial Solutions investment advisor Arthur Garipoli seems to be on the same page.
He recently told The Bull that Wesfarmers' "strong retail brands" should allow it to "ride out pressures on household budgets".
So, is the Wesfarmers sell-off unwarranted?
Well, if Scott turns out to be right, then it might be a case of investors throwing the baby out with the bathwater. Wesfarmers the baby. Retail shares the bathwater.
