In the latest fiscal year, Wesfarmers Limited (ASX:WES) has impressively surpassed expectations, showcasing resilience amid challenging conditions.
FY22 Results Exceeding Expectations
Kmart Group, a standout performer, demonstrated a strong recovery in 2H22 following 1H22 lockdown impacts. Additionally, the FY22 Dividend Per Share (DPS) of 180cps exceeded forecasts and Bloomberg consensus. The Group's Return on Equity (ROE) surged by 330 basis points to an impressive 29.4%.
Challenges and Areas of Concern include a 120 basis points drop in the Group's EBIT margin to 9.3%. The Health division's EBIT, for the initial three months of ownership in FY22, reported at -$24 million. Furthermore, operating cash flow declined by 32% due to higher working capital, predominantly in inventory.
Retail trading conditions have remained robust, as assured by management through the first seven weeks of FY23. Projections for FY23-25F group underlying EBIT changes range between -1% and +3%.
Financial Performance
FY22 Result Overview: Underlying EBIT declined by 4% to $3,633 million, a 3% decrease in underlying NPAT to $2,352 million. Earnings in retail divisions were mixed, with Bunnings EBIT up slightly (+1%), while Kmart Group (-36%) and Officeworks (-14%) experienced weakness due to 1H22 lockdowns. The Industrials businesses had a good year, with WesCEF EBIT up 41% on the back of higher commodity prices, and Industrial & Safety EBIT rose 30%. EBIT for the newly created Health division (3 months) was -$24 million, including several one-off charges. Excluding these charges, Health EBIT was $12 million.
Bunnings and Kmart Performance
Bunnings Highlights
Bunnings FY22 EBIT rose by 1% on the back of 4.8% LFL sales growth. Although earnings were slightly below (-1%) forecasts, it was a commendable result given the strong growth over the past two years. EBIT margin fell 60 basis points to 13.1%, attributed to operational challenges related to COVID and ongoing supply chain disruptions. The change in mix from higher Trade activity also had a negative impact on margins. For FY23, Bunnings EBIT is forecasted to decrease by 3% to $2,248 million.
Kmart Group Resilience
Kmart Group FY22 EBIT decreased by 36% to $506 million, yet the result was 23% above forecasts. 2H22 performance (EBIT +12%) significantly improved from 1H22 performance (-58%), which was significantly affected by lockdowns. Trading conditions improved in 2H22 as restrictions eased. For FY23, Kmart Group EBIT is forecasted to jump by 67% to $843 million after cycling the lockdown impact in FY22.
Retail Conditions and Future Projections
Retail trading conditions have remained robust, particularly strong in Kmart Group, with sales significantly higher on both a one-year and two-year basis. Bunnings also continues to see positive sales growth on a one-year and two-year basis. Overall, the forecast for FY23 group underlying EBIT anticipates a 5% increase to $3,827 million.
Adjustments and Investment Outlook
Adjustments have been made to FY23F/24F/25F underlying EBIT by +3%/-1%/-1%. Underlying NPAT changes by -2%/-6%/-5%, reflecting a remodelling of net interest expense. The equally-blended (PE, SOTP, DCF) target price falls, maintaining the Add rating. Trading at 22.5x FY23F PE and a 3.8% yield, WES remains an attractive investment with a diversified group of retail and industrial brands, a solid balance sheet, and a strong leadership team poised to deliver long-term value for shareholders.
