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Wesfarmers Ltd (ASX:WES) result: Is a spending cliff dead ahead?

Wesfarmers Ltd (ASX: WES) delivered its financial year result earlier today, reporting a 10.5% increase in revenue from continuing operations — that is, excluding Coles Group Ltd (ASX: COL) — and an 8.2% increase in net profit to $2.08 billion.

The profit result was a slight beat on expectations of $2 billion.

The highlight for me was a strong dividend of 0.77 cents per share, down just 1 cent from 2019, along with an 18-cent per share special payment from the sale of 10% in Coles Group.

Under the hood

To me, Wesfarmers remains a shell for the dominant Bunnings franchise, which saw revenue increase another 13.9% to $15 billion and some 50% of the entire group. Second-half sales were particularly strong in the second half.

However, management flagged the potential for a spending cliff as Government stimulus payments reduce towards the end of 2020.

As expected, Officeworks delivered 20.4% sales growth and a 14% increase in earnings to $197 million as the population looked to set up home offices, upgrading everything from computers to office chairs.

The now combined Target and Kmart division hide the weak performance of the former, with sales down 2.6%. Kmart continues to deliver higher sales, up 5.4%, but it experienced a fall in earnings due to store closures.

Management flagged a switch to a JB Hi-Fi Limited (ASX: JBH) approach as they seek to integrate the acquisition of Catch Group, by using the diverse Kmart and Target network as a Click-and-Collect site for online purchases; a sound strategy to maximise their huge floor space.

Diverse earnings & capital management

The real reason most investors hold Wesfarmers shares is for its ability to deploy capital and run strong businesses over the long term. This was proven once again by its leading return on capital levels achieved at Bunnings (50%), Kmart (30%), Officeworks (17%) and even the WesCEF division (33%).

What this means is Wesfarmers’ management are putting shareholder capital to work for a profit. And with essentially no debt and free cash flow exceeding $4 billion there is little doubt Wesfarmers will be seeking another acquisition as the fallout from COVID-19 continues.

Summary: Great result but some uncertainty ahead in 2021.

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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