The Wesfarmers Ltd (ASX: WES) share price has dropped 6% over the past week after the retail conglomerate warned of more price cutting and "fixed cost inflation" across its core Coles supermarkets business.
Today shares swap hands for $40.15, compared to prices above $43 just last week as the theory of an intensifying supermarket price war caused analysts at Credit Suisse and Citigroup to downgrade their profit forecasts for FY 2017 and FY 2018 according to the Australian Financial Review.
I covered in this article on fast-food franchisor Retail Food Group Limited (ASX: RFG) why sell-side analysts like to constantly adjust their short-term "share price targets" on businesses, alongside their buy, sell, or under or overweight ratings.
The constant changing of "share price targets" is partly because the sell side normally includes brokerage arms that have a deeply vested interest in drumming up trading volumes.
However, as a potential investor in Wesfarmers I would not focus on short-term share price movements too much to instead consider the long-term prospects of the business over a three to five-year time horizon.
Wesfarmers is a business of multiple moving parts, but its core challenge will remain delivering same-store sales and profit growth at its Coles supermarkets.
Given that Woolworths Limited (ASX: WOW) is now sacrificing profits to reduce prices and win back market share from Coles it does look like it faces short-term challenges in maintaining same-store sales growth.
The other issues for both the supermarket majors are the rise of super-cheap operators Aldi and Costco, plus the potential entry of Amazon Inc. into the online supermarket space over the long term.
Wesfarmers also warned that its newly-formed Bunnings UK and Ireland business has encountered "significant disruption" including $26 million of restructure costs, as it attempts to replicate Bunnings' blockbuster Australian success in the UK and Ireland.
For now I would rate Wesfarmers shares as a hold as it is a good business on an ok valuation and remains a reasonable bet for conservative investors focused on a mixture of yield and defensive earnings.
