Wesfarmers Earnings: Cautious Consumers and Lower Commodity Prices Make for Muted Earnings Growth

We maintain our AUD 42 fair value estimate for shares in wide-moat-rated Wesfarmers WES. The conglomerate’s fiscal 2023 NPAT of AUD 2.465 billion was merely 3% below our estimate, and our longer-term estimates are largely unchanged. Our fiscal 2024 EPS estimate of AUD 2.23 implies earnings growth of 2%, weaker than the 5% achieved in fiscal 2023. At current prices, shares screen as overvalued versus our intrinsic assessment. Also, considering the mid-single-digit compounded earnings growth Wesfarmers generated in the past three years, and our outlook for similar muted earnings growth in the near term, a price/earnings ratio of 23 looks expensive. The board declared fully franked dividends of AUD 1.91 per share in fiscal 2023. We forecast the dividend to be maintained at AUD 1.91 per share in fiscal 2024, fully franked, offering a yield of 3.8% at current share prices or 4.5% at our fair value estimate.

Revenue growth in Wesfarmers’ largest segments, Bunnings, Kmart Group, and WesCEF, slowed in the second half of fiscal 2023. Together, the three segments accounted for over 90% of earnings from operations.

Hardware retailer Bunnings saw unusually soft sales growth of 2% in the second half, as its do-it-yourself, or DIY, customers dialed back on their spending. A challenging macroenvironment is weighing on discretionary spending, and home improvement isn’t immune. However, strong demand from Bunnings’ commercial customers—about one third of its sales—offset declining DIY sales in the second half. In the first seven weeks of fiscal 2024, Bunnings sales growth remained in the low single digits, but the DIY segment returned to growth.

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