Business

Wesfarmers urged to sell Target, boost Bunnings

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Wesfarmers should ditch its struggling discount department store Target and instead boost dividends or pump more cash into its star hardware chain Bunnings.

That's the view of Kimber Capital's Greg Fraser, who argues Wesfarmers will be "bursting at the seams" once it sells its coal division for an estimated $2 billion.

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"What should Wesfarmers put on its shopping list?" Mr Fraser asked in a note to clients.

"It has already forked out a small amount to let the Bunnings business have a crack at the UK homeware market, but this will take at least five years to measure its success or otherwise.

"The Target business has regularly disappointed investors but throwing more money at it may not be the answer."

Mr Fraser said defending the large food and liquor business against the inevitable lower margins brought about by competition from German discounter Aldi and a resurgent Woolworths would be a logical priority.

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"[Long-time Wesfarmers CEO] Mr Goyder has already pointed to the threat posed by [online retailer] Amazon's imminent arrival to Australia so maybe there is an element of war-chest building going on," he wrote.

"But perhaps the portfolio approach, which has worked well for the company at times, has become a burden.

"When one business is delivering really good returns on capital such as [discount department store] Kmart (37.7 per cent in the 2016 financial year) and another is not, such as Target (minus 8.2 per cent in the 2016 financial year), does the group effort get diluted?"

Mr Fraser said there might be an argument for "culling the underperformers instead and redirecting the capital towards the better businesses such as Bunnings, or returning capital to shareholders".

"If Mr Goyder does retire following a successful sale of the coal business, he will leave his successor with an enviable position of financial strength. Maybe shareholders will be the first beneficiaries with a return to stronger dividends," he wrote.

"Some investors will recall the days of the great Aussie diversified industrials such as Pacific Dunlop and BTR Nylex but they are no longer. Is there an argument for Wesfarmers to learn from that history and more tightly focus its investment portfolio?"

Woolies tipped to outshine

The comments come as the market tips Coles to post lower growth this quarter than Woolworths for the first time since 2009.

Deutsche Bank has tipped Woolworths' supermarkets to post 1.5 per cent growth in like-for-like sales (excluding new stores), and Coles to report just 0.6 per cent growth for Coles Food and Liquor.

"Industry feedback suggests that while Christmas trading was competitive, Woolworths was the overall winner due to better execution and more relevant promotions and took share from Coles and Metcash, and outperformed Aldi," it told clients.

"We expect this to be reflected in the second-quarter sales growth as well as the outlook."