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More growth in FY21: Why Wesfarmers (ASX:WES) shares could be a buy

Wesfarmers Ltd (ASX: WES) shares could be a buy after the diversified retail business announced more growth in FY21.

Wesfarmers’ FY21 update

Wesfarmers has revealed that its sales have continued to grow strongly in the first four months of FY21, to October 2020.

It said that Bunnings grew total sales by 25.2%, with comparable sales growth of 30.9% and online penetration of 3.8%.

Kmart delivered total sales growth of 3.7% with comparable sales growth of 9.4% and online penetration of 10.2%.

Target saw total sales decline by 2.2%, although comparable sales went up 9.9% and online penetration has reached 18%.

In gross transaction value terms, Catch grew total sales by 114.4%. Obviously online penetration here is 100%.

Officeworks reported total sales growth of 23.4% and online penetration has reached 39.3%.

Overall, Wesfarmers said that its retail businesses have delivered total online sales growth of 166% excluding Catch. And excluding online sales in metro Melbourne, which was higher because of trading restrictions, online sales growth was 98%.

A closer look at Bunnings

Bunnings is the key profit driver of Wesfarmers, so I think it’s worth looking a bit closer at it.

Management said that Bunnings has seen continued strong sales growth in both consumer and commercial segments, particularly with consumers continuing to do projects around the home.

Excluding metro Melbourne stores, total sales grew by 29.3% in the financial year to October. Management are also pleased by the progress with Bunnings’ digital agenda, with online sales penetration excluding Metro of 1.5%.

Other Wesfarmers divisions

Wesfarmers isn’t just a retail business. It also has industrial divisions. In chemicals, energy and fertilisers demand for ammonium nitrate remains resilient but the division continues to rely on commodity prices and seasonal conditions.

In industrial and safety, Blackwoods has benefited from growth in sales to major customers and strong demand for safety and hygiene products while the demand from oil and gas, and general manufacturing customers has been weaker.

Summary thoughts

Wesfarmers revealed that as a result of pent-up demand, the trading performance across stores in Melbourne has been very strong since they re-opened to retail customers on 28 October 2020.

It seems like the strong retail conditions will continue at least to the end of December 2020, which is good news for Wesfarmers’ FY21 first half result – indeed it’s good for the whole FY21 result.

According to CommSec, Wesfarmers is valued at 25x FY22’s estimated earnings. This is pretty pricey, but in this low interest environment it could be a fair price with how strongly Bunnings is performing.

There are other ASX dividend shares I’d also consider like Brickworks Limited (ASX: BKW) which I wrote about here.

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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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