The decline came despite strong performance from most of Wesfarmers' other businesses, especially Bunnings and its resources division, which benefited from higher coal prices. But Coles is now Wesfarmers' main growth engine and that's where the focus rightly is.

There is a simpler explanation for the pressure on its share price: they paid too much for Coles. Shareholders will suffer weaker profitability for years before the payback. If the turnaround is successful and Coles can start generating the sort of return on capital that rival Woolworths is capable of, that will create shareholder value. But at what cost in the interim?

Wesfarmers is one of the few Australian blue-chip companies that genuinely understands how shareholder value is created. This is why it always gives details of divisional return on capital and overall return on equity, or shareholders' funds. Last week's headline profit-growth numbers looked good but return on shareholders' funds across the business dropped from 25.1 per cent last year to 8.5 per cent this year.

Given the additional capital raised to buy the underperforming Coles, it is not surprising that profitability (as opposed to profits) has declined. But the deterioration would not have been so bad if Wesfarmers hadn't paid nearly four times Coles's book value, which was too high a price.

The outlook Wesfarmers has the task of continuing its massive turnaround program in a slowing economic environment. There is little doubt the turnaround will prove successful in time. The stellar performance of its other retail division, Bunnings Warehouse, indicates genuine management expertise and skill in this area. But Wesfarmers will take years to get back to generating 25 per cent-plus return on equity numbers.

Price Although Wesfarmers has been a strong dividend payer over the years, its recent share price performance has been lacklustre. At about $33, the shares are again approaching the lows for the year and are well down on the highs of about $45, reached in the euphoric days of the Coles acquisition.

Worth buying? Despite the company's quality asset base and management team, Wesfarmers is facing some short-term headwinds that make us cautious about buying. Firstly, the slowing economy could lead to lower than expected earnings for next year and the stock price is moving down noticeably. Another area of concern is the company's large capital expenditure requirements, which will hit $2 billion next year - up from $1.2 billion last year. Given Wesfarmers pays out a decent portion of its earnings as dividends, the company will continue to be under pressure from a financing perspective. The dividend reinvestment plan has been reinstated to assist with the funding requirements; however, such a plan will also ensure that more shares are on issue, diluting the per-share statistics. Avoid for now.