Wesfarmers Ltd (ASX: WES) is an Australian conglomerate. Wesfarmers has interests in Australian and New Zealand that cover businesses such as, home improvements and outdoor living, apparel and general merchandise, office supplies and in the industrial sector with businesses in chemicals, energy, fertiliser, lithium mining and industrial safety products. Wesfarmers has a market capitalisation of A$47 billion.
What are the key points from Wesfarmers report (announced 9 June 2020)?
Total sales growth for Bunnings (2H20 to date) increased by 19.2%. Total sales growth for Kmart (2H20 to date) increased 4.1%. Total sales growth for Target (2H20 to date) fell 1.8%. Total sales growth for Catch (Gross transaction value) increased by 68.7%. Total sales growth for Officeworks (2H20 to date) increased by 27.8%.
The key point from this result is that significant demand has continued in 2H20 for Bunnings and Officeworks products as economic agents continue to spend more time working, learning and relaxing from home. An important point to note is the increase in consumer demand is not likely to continue throughout the calendar year. As economic agents begin to go back to the office, and less time is spent at home, demand for these goods may normalise throughout the year.
Bunnings stores have experienced a growth in all consumer product categories and in all regions across Australia. Wesfarmers has also committed around $20 million in additional clearing, security and protective equipment to respond to COVID-19 over the last three months. Bunnings will incur costs of around $70 million in the FY20 associated with trading restrictions in New Zealand due to the permanent closure of seven small-format stores during the half and the accelerated roll-out of its online offering, including the write-off of legacy e-commerce platform assets.
Interestingly, sales momentum in Kmart and Target has improved with a general increase in customer footfall in shopping centres and a recovery in customer demand for apparel, particularly winter clothing. In Kmart, significant growth in high-demand categories such as home and living ranges has resulted in some availability issues in recent weeks and is expected to impact sales in June. Additional operating costs associated with COVID-19, together with the temporary closure of New Zealand stores, will also impact Kmart Group’s earnings in the 2020 financial year.
Officeworks has experienced strong demand from technology, home office furniture and learning and education products. However, as mentioned previously, this environment may ease as economic agents return to working in the office, and not from home.
What is the outlook?
As announced on 22 May 2020, Wesfarmers will be converting suitable Target and Target Country stores to Kmart stores. This includes converting between 10 to 40 large format Target stores to Kmart stores and converting around 52 Target country stores to small format Kmart stores. Wesfarmers will be closing between 10 to 25 large format Target stores and the remaining 50 small format Target Country stores. Wesfarmers will also be restructuring the Target store support office.
This recent announcement of closing and converting several Target stores could allow for a stronger financial performance moving forward. However, investors will not know the financial effect of these closures and conversions for some time.
Regarding the short-term outlook, as economic agents return to work and consumer spending patterns normalise, growth throughout in the calendar year is likely to not be as strong as what has been announced.
What is the market reaction?
The market reaction to Wesfarmers announcement was positive. Wesfarmers share price increased slightly yesterday. Interestingly, Wesfarmers is up around 4% today and is currently trading at A$43.48. Wesfarmers has a forward P/E ratio in the mid-twenties and an annual dividend yield of around 3.8%.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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