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Wesfarmers Facing Problems, Catch A Mess, Citi Recommends Sell

Wesfarmers the owner of Bunnings, Kmart, Target, Officeworks and the struggling Catch online site has been rated as a sell with the Company exposed on multiple fronts, now questions are being asked about Harvey Normans future.

Citi analysts have recommended a sell rating and have tagged a $49.00 price target on the company’s shares which implies a potential downside of 14.5% over the next 12 months.

While COVID delivered initially boom business for the retail group, it’s now delivering a downside with their retailers struggling to get stock across multiple fronts.

China’s supply-chain snarls intensified significantly in April and may get worse before they get better and this is a real problem for Wesfarmers due to their exposure across clothing, building materials, consumer electronics claim observers.

Building projects in Australia are still being held up by delayed in building materials with Bunnings telling trades that they are out of stock of timber, plumbing and electrical products.

Wesfarmers non-retail businesses appear to be performing well with Wesfarmers noting strong demand for ammonium nitrate and favourable LPG pricing.

Analysts are also concerned about stock supply to both JB Hi Fi and Harvey Norman with both organisations trimming costs due to anticipated slow trading caused by the Election, Inflation concerns, and consumers spooked by rising interest rates.

Another major problem for Wesfarmers is the Catch Group who they acquired for $230 million in cash prior to the start of COVID lockdowns.

Shortly after they acquired the business e-commerce in Australia took off, with online retailers reporting record sales, now the boom is over.

Wesfarmers had fortuitously acquired the perfect asset for this moment, but in hindsight, it missed the shot.

Analysts lifted their valuation of Catch to $2 billion, up almost 10 times in only two years and worth more than Kogan.

Recently Catch has turned a $17 million profit into a $15 million loss, despite the huge COVID-19 tailwind.

Officeworks new image

Credit: Officeworks

During the same period, Kogan’s earnings surged 130 per cent to about $39 million and Temple and Webster’s rose five-fold to $15 million the AFR reported.

From there, things got worse, and Catch’s performance deteriorated sharply, despite repeated lockdowns in big Australian cities.

A year later, from July to December 2021, total transaction value was stagnant, revenue actually fell, and losses almost tripled to $44 million.

Several long-serving senior executives also left under the new owners and are now in major leadership roles, they included former JB hi Fi executive Ryan Gracie (now chief marketing officer of MyDeal).

Wesfarmers has moved quickly to change the direction of Catch moving it from the Kmart division to a new OneDigital group led by digital boss Nicole Sheffield.

Another issue facing Wesfarmers is that Cit be anticipates that Australian households will have reduced capacity to spend on domestic retail in FY22 and FY23.

It predicts the sector is set to face headwinds to the tune of $68 billion and $61 billion, respectively.

It also expects “a further drag from additional interest rate increases and the resumption of normal travel activity in FY24”.

The broker mentions both Harvey Norman and home hardware giant Bunnings throughout its review, noting the latter’s softer earnings prospects.

After slashing its valuation on Wesfarmers by 16% to $42 per share, citing risks to “margins normalising back towards pre-COVID levels and slower revenue growth as the housing market cools”.

Meanwhile, 25% of brokers covering the stock have Wesfarmers still rated as a buy while 50% have it rated as a hold, according to Bloomberg data.

In the last 12 months, the Wesfarmers share price has compressed down by more than 8% after a 16% slump this year to date.

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