Wesfarmers (WES): They presented their half-year 2024 profit results, which were better than Atlas’ optimistic expectations. What was evident was that WES’s businesses are performing well in a consumer slowdown and taking market share from value-conscious consumers. The HNW Equity Portfolio has a 5% & the Income Portfolio a 4% weight to WES.

Key Points:

  • Record profits: Earnings increased by +3% to a record $1.43 billion, driven by a solid 27% increase in Kmart earnings, indicating customers trading down to their lower-priced products. WesCEF (Chemical, Energy and Fertiliser) was negatively impacted throughout the half due to higher natural gas prices for their fertilisers and lower lithium hydroxide pricing. Wesfarmers remain confident in the long-term value creation and the lithium market’s tailwinds.
  • The Strength of Bunnings: Wesfarmers’ flagship company, Bunnings, profits grew by 3% and continue to dominate after record years from the Covid pandemic’s work-from-home restrictions and renovations. Bunnings was able to grow its profits by being able to control its costs very closely, especially around labour costs, as they continue to face inflationary pressures. Bunnings is an excellent business with a 13% profit margin and an impressive 66% annual return on capital.
  • Dividends Up: Wesfarmers provided a half-year fully franked dividend of $0.91, up 3.5%, representing a payout ratio of 72%.
  • Balance Sheet: WES continues to have a very strong balance sheet with a net debt position of $4 billion and $2.4 billion in unused bank facilities. This debt has increased due to investments in lithium that will contribute to earnings in the coming year.
  • Guidance: Wesfarmers did not provide any explicit guidance, though management indicated that momentum in Kmart had continued in January and February 2024, with both Bunnings and Officeworks performing in line in line with the first few months of 2023. This pleased the market greatly that has expected falling sales.

Portfolio Strategy: WES give the portfolio exposure to a stable, diversified stream of earnings exposed to the Australian economy primarily through hardware (Bunnings), office supplies (Officeworks), discount department stores (Target and Kmart), pharmacy (Priceline), chemicals and in the near future lithium.  WES is a very well-run company, with CEO Rob Scott consistently making good moves for shareholders since taking over in 2018. In the portfolio, we only own the retailers that dominate their markets (Wesfarmers and JB Hi-FI) and are the lowest-cost operators. This result from WES shows that value-conscious consumers are still happy to open their wallets.

Wesfarmers were up +5% to $61.91, after reporting strong first half results.