Wesfarmers Ltd (ASX: WES) is the leading Australian retailer owning some of Australia's largest chains including Coles, Bunnings Warehouse, Kmart, Target and Officeworks.
The last 12 months for Australian retailers has been incredibly difficult with the looming introduction of American giant Amazon to Australia weighing heavily on the industry.
High profile retailers such as Harvey Norman Holdings Limited (ASX: HVN) and JB Hi-Fi Limited (ASX: JBH) have been sold off by 19% and 16% respectively, despite delivering solid numbers during reporting season. They remain two of the most shorted stocks on the Australian market as it anticipates Amazon's introduction.
Wesfarmers' Exposure
Amazon's launch in Australia is expected to occur incrementally with the initial focus on clothing, electronics, and leisure items.
Certain divisions of the Wesfarmers' conglomerate such as Coles are not likely to be in direct competition in the short term as Amazon's entrance into the Australian grocery market is expected to occur later on. The bigger problem with Coles remains the supermarket's flat revenue and declining margins.
If we examine Wesfarmers' divisional earnings summary from its FY17 presentation we can see which segments of the conglomerate will be directly competing with Amazon.
Aggregating the total EBIT of Kmart ($553 million), Target ($10 million loss) and Officeworks ($144m) gives us a total of $687 million. The total EBIT of the Wesfarmers Group was $4.4 billion which results in an earnings impact of about 16%.
Wesfarmers remains well diversified in comparison to other Australian retailers with the Coles, Home Improvement and Industrials divisions contributing the bulk of the group's overall earnings. Hardware chain Home Depot in America has shown thus far that the hardware market remains one of the last segments e-commerce has yet to steal significant market share off.
Source: Wesfarmers FY17 Presentation
Divesting Kmart, Target and Officeworks?
In September there was some speculation reported in the media that Wesfarmers could divest its interests in Kmart, Target and Officeworks into a single company to be listed on the Australian Stock Exchange. It has been estimated that the combined value of these three businesses could be around $6 billion.
In my view, there is definitely some merit in pursuing this even though Kmart and Officeworks have been solid performers. Wesfarmers could then use the proceeds from divesting to purchase other businesses. For example, the acquisition of fertilisers and explosives company Incitec Pivot Ltd (ASX: IPL) has been speculated on for quite some time.
