Target scandal weighs on Wesfarmers shares

Revelations that Target’s half-year earnings received a $21 million artificial boost have hurt parent company Wesfarmers’ share price.

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Wesfarmers, which also owns Kmart, Coles, Bunnings and Officeworks, on Monday afternoon revealed that Target had arranged cheaper prices with 31 overseas suppliers for the first half of fiscal 2016 on the promise it would pay more in the second half.

The Perth conglomerate said the deals amounted to $21 million in income for the half and covered a shortfall in earnings for Target.

Without the deal, Target’s earnings before interest and tax would have been $53 million in the first half of FY 2016 instead of the $74 million reported.

Analysts say that while Target forms a small part of the Wesfarmers’ group, the rebate scandal has hurt the company’s share price.

CMC Markets chief market strategist Michael McCarthy says that when the rebates are removed, Target’s earnings are flat and indicates Target is not on the cusp of a recovery as investors were led to believe.

“The market was factoring in a recovery in Target given the turnaround strategy was implemented a little over two years ago and is ongoing,” he said.

“Those better-than-expected numbers spoke to the success of that strategy. In stripping out those numbers, the earnings now look flat and the market is now questioning whether that strategy is actually working.”

IG market analyst Angus Nicholson said that while the wider share market was having a weak day, he believed the Target scandal was hurting Wesfarmers.

“Wesfarmers is faring worse than Woolworths and others in that space today and it is probably because Target is not doing as well as first thought,” he said.

At 1118 AEST, Wesfarmers shares were down 1.27 per cent, or 51 cents, at $39.51.

Wesfarmers has said disciplinary action was being taken in relation to the 10 people or so involved in the rebate arrangements.

So far, three people have lost their job, including former Target managing director Stuart Machin, who quit on Friday.

Mr Machin said he was unaware of the supplier arrangements but agreed to resign because it happened on his watch.

Wesfarmers and external auditors Ernst & Young began investigating Target in March after allegations were brought to the attention of a newly installed management team following Wesfarmers’ restructure of Kmart and Target into a single department store division.