Consumer cyclical

Wesfarmers outlines growth focus: But no new guidance

Thu 02 Jun 22, 1:39pm (AEST)
Kmart Wesfarmers Retail

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Key Points

  • Capex spending of $900m to $1bn in FY 2022
  • Abnormally high” inventory levels to remain elevated in 2H FY22
  • Online sales, up threefold on 1H FY19 levels

Despite outlining a strong growth focus, an elaborate strategy briefing released by Wesfarmers (ASX: WES) this morning did little to capture the market’s imagination, with the share price down -0.42% at noon, but not as much as the broader market (down -1.00%).

Within a potpourri of updates, the Perth-based conglomerate told investors of plans to strengthen existing businesses by securing growth opportunities being entrepreneurial, engaging in value-adding transactions and enhancing its supply chain capabilities.

No financial guidance was shared with investors this morning.

Bunnings remains a primary focus

CEO Rob Scott highlighted four value-creating strategies including strengthening Wesfarmers' existing portfolio of businesses, grabbing new growth opportunities, renewing its portfolio and ensuring sustainability through responsible long-term management.

Overall, Scott noted that consumer demand remains healthy, while inflation and interest rates were likely to moderate shoppers’ behaviour over the next year.

“Wesfarmers’ retail divisions are well equipped to manage inflationary pressures and view this as an opportunity to profitably grow share while extending value credentials," Scott noted.

As expected, management reaffirmed the conglomerate’s focus on developing Bunnings - its biggest revenue generator – while also hinted at improving the performance of API and its new Health division.

Highlights within today’s announcement include:

  • The extension of its OnePass loyalty program for shoppers to its businesses Kmart and Target.

  • Inventory levels in H2 of its fiscal year to remain elevated due to API, inflation and commodity price impacts and ongoing prioritisation of stock availability.

  • Capex spending of $900m to $1bn in FY 2022, including $320m developing the Mt Holland lithium project.

  • Establish a health division through the recent takeover of API

  • Acquisition and creation of Tool Kit Depot and Beaumont Tiles

Inventory levels to normalise

While Wesfarmers reported “abnormally high” inventory levels in the first half FY22, due to the decision to temporarily hold more stock, domestic supply chain disruptions, and higher commodity prices, the conglomerate expects them to remain elevated in second half of FY22 before starting to normalise.

Other noteworthy takeways from today’s update included a major boost in online sales, up threefold on first half of FY19 levels, and the planned expansion of WesCEF - a business portfolio supplying products to critical industries – which is committed to achieving net zero emissions.

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Wesfarmers share price over 12 months.

What brokers think

Wesfarmers is down -16% over 12 months, and in the year-to-date the share price has fallen from $60.06 4 January to $47.32 today.

Consensus on Wesfarmers is Hold.

Based on Morningstar’s value of $47.20, the stock appears to be fairly valued.

With Wesfarmers offering fewer details than expected on key drivers of growth, particularly around Bunnings and Kmart, the outlook for API or the corporate restructuring options for Officeworks and Industries, Goldman Sachs rates the stock a Sell: Target price 39.50.

Based on the six stocks covering Wesfarmers (as reported on by FN Arena) the stock is currently trading with 12.10% upside to the target price of $53.09.

UBS notes the addition by Bunnings of DIY options in premium categories, such as pool fencing, will allow the brand to reach new customers, and retains a Buy rating and target price $56.00.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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