Wesfarmers has investors confused, as it sells more Coles stock

Wesfarmers has sold a second slice of its stake in supermarket giant Coles. Picture: Getty Images

Wesfarmers chief Rob Scott has punters confused after the sale of another five per cent of Coles, which either gives him a pristine balance sheet ready for acquisitions, or shows he’s battening down the hatches for more shutdowns.

The Coles sale was at $15.39 a share, some five per cent below the February 19 sale price of $16.08 a share and 10 per cent below market at $16.82 a share.

When he sold the first stake last month, Scott joked that if he thought it was the top of the market he would have sold more.

As events have transpired he sold the next five per cent at a lower price and in selling Coles he has dumped what most investors would regard as a must-have retail stock, given it is making out like a bandit in the coronavirus shutdown.

It has no real price pressure, COVID-19 restrictions mean more people are eating at home and sales are booming.

Scott has sold and closed more assets than he has acquired, so it’s a question whether this may mean a change in strategy.

New Zealand has tougher coronavirus restrictions than Australia, with the equivalent of Kmart, Target and Bunnings effectively shut down to retail trade. Bunnings in New Zealand is only open for the building trade.

Scott has argued Bunnings and Target are essential - the latter to provide winter clothes.

This is a stretch and if he was forced to shut for three months that would mean the entire winter inventory would need to be written down.

Bank of America figures the earnings before interest and tax loss for Wesfarmers would be as much as between $1.3 and $1.7 billion.

That’s the bad news.

The good news is in the last month Wesfarmers has raised $2 billion in cash, which means net debt is down to $500 million before lease payments.

Wesfarmers regards itself as a good corporate citizen so is unlikely to follow Solly Lew’s actions in simply shutting down stores and refusing rental payments.

But Scott now has a virtual clean slate to spend up big as targets fall amid the virus.

Take your pick on which of the two scenarios Scott is working on.

The bottom line is that he has flexibility, which is what all portfolio managers would like, but having dumped a quality stock investors will also be looking for sustainable returns.