Every now and then you see the smarties in the stock market outsmarted by someone else, usually themselves.
On Thursday, Wesfarmers’ shares stood out with a $1.40 or 3% plus jump to $44.20 and touched a year’s intra-day high of $44.25.
The movement stood out because the wider market fell by half a per cent in a miserable day’s trading that had brokers and investors wondering what was going on.
The argument for the rise was the desire by investors to own a defensive stock with Wesfarmers because of its ownership of Coles, Target, Kmart, Bunnings, Officeworks and a big grog business. Rival Woolworths saw its shares rise a more sedate 32c to $34.71.
More than 5.36 million shares were traded on Thursday. You can certainly say no one was aware of what was to happen on Friday when Wesfarmers produced a not too surprising downgrade of the outlook for its Target chain of mid range department stores.
It wasn’t that surprising because Target was the laggard at the halfway mark and Target’s CEO departed a month or so ago in something of a surprise announcement. Usually when that happens, you can almost expect more bad news on the sales and/or earnings front.
Wesfarmers said in the statement that it now expects Target’s earnings before interest and tax (EBIT) for the 2013 financial year at between $140 million and $160 million. This compares to EBIT of $244 million in 2011-12 and analysts’ expectations for this year’s full year earnings of around $230 million.
That means it is likely Target will have a second half result somewhere between a profit of $12 million and a loss of $8 million.
Wesfarmers expects Target’s bottom line to be hit by weak sales in the second half of the year that have been exacerbated by a warmer than average autumn. Excess inventory had also forced the retailer to hold more sales for longer periods and recent restructuring of the business had also taken a bite into earnings. Some analysts reckon the poor result for Target could trim up to 2% from Wesfarmer’s group earnings for the year to June.
After the statement, Wesfarmers shares turned tail and fell for much of the day, closing down 3% for the day or $1.27, at $42.90 – well below that 52 week high.
But the shares still added 1.4% for the week, thanks to gains made before Thursday.
The big fall in Wesfarmers’ shares on Friday told us nothing except the management and security of the group is pretty good and there was no news leak ahead of the downgrade.
The downgrade itself tells us nothing about the performance of the retailing sector, more about weak management at Target (compare that to the solid going for Kmart, its more downmarket stablemate). It told us nothing about how Coles, Kmart and the other retail and non-retail businesses in the rest of Wesfarmers are travelling.
Wesfarmers – Target Update
