Wesfarmers

Shares in Wesfarmers have fallen 3% after the company warned that its Target retail business would only break even in the six months to June. Target, which made earnings before interest and tax of $148m in the six months to December, is now expected to earn between $140m and $160m in the year to June, down from $284m in 2012. It’s not quite as bad as it sounds, though, because the business is highly seasonal, with first-half EBIT typically being more than double second-half EBIT.

The announcement blamed the profit fall on a weak sales performance, ‘exacerbated by a late start to the winter season impacting both sales and margin’, higher levels of clearance activity from excess inventory, higher ‘shrinkage’ (ie theft and bookkeeping errors), and increased restructuring costs.

Target has been the main weakness in Wesfarmers’ retail performance in recent years and management is clearly working hard to turn it around. At the time of the interim result on 14 Feb 13 (Hold $39.12) we wrote that it was ‘a case of one step back and two steps forward, and this result was clearly in the first category’. Well the second half is obviously heading the same way.

Target contributed 7% of Wesfarmers’ EBIT in 2012, but that will fall to below 4% this year. In that context, while it's likely to remain an irritation for some time, it isn’t going to have a major impact on Wesfarmers’ overall value.

The stock is up 9% since 14 Feb 13 and we're raising our recommended maximum portfolio weighting from 5% to 8% in line with recent changes in our approach. HOLD.