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Wesfarmers (ASX:WES) share price on watch after strong FY22 second half and outlook

The Wesfarmers Ltd (ASX: WES) share price is on watch after the giant ASX retail share announced its FY22 result to investors.

Wesfarmers is a business that owns a number of different businesses including Bunnings, Kmart, Officeworks, Target, Catch and API (including Priceline).

FY22 result

Here are some of the highlights from the Wesfarmers FY22 result:

Wesfarmers Health is a new division within the company after buying Australian Pharmaceutical Industries (API), which came with businesses like Priceline, Soul Pattinson Chemists and Clear Skincare Clinics.

While net profit did decline slightly for the year, it rose by 13.1% in the second half. The first half included plenty of COVID-19 impacts such as store trading restrictions or closures.

These numbers were achieved despite constraints in global supply chains and domestic ports leading to delays and additional costs, including higher container shipper and demurrage expenses during the year. Additional fulfilment costs were incurred in stores and distribution centres to accommodate peak periods of online demand.

Divisional breakdown

There was a divergence of performance between businesses over FY22 and in the second half. Looking at the earnings before tax (EBT), excluding significant items, these were the numbers for the year:

  • Bunnings EBT rose 0.9% to $2.2 billion
  • Kmart Group EBT fell 39.7% to $418 million
  • Wesfarmers chemicals, energy and fertilisers (WesCEF) EBT jumped 40.6% to $540 million
  • Officeworks EBT fell 14.6% to $181 million
  • Industrial and Safety EBT soared 31.4% to $92 million.

The second half saw an improvement for each growth rate, but the standout turnaround was Kmart Group seeing a 16.5% rise in EBT in the second half to $240 million. But, the WesCEF division was the second biggest profit generator in the half, seeing EBT rise 43.8% to $322 million. I think these numbers are promising for the Wesfarmers share price.

Within the Bunnings business, Wesfarmers completed the acquisition of Beaumont Tiles in November 2021 which came with 115 Beaumont Tiles stores.

Outlook and trading update

Wesfarmers said that its retail businesses are well positioned as cost of living pressures impact household budgets and “value once again becomes increasingly important to customers”. The retail businesses are focused on delivering “even greater value, quality and convenience”.

In the first seven weeks of FY23, sales growth has been “particularly strong” in Kmart Group, with sales “significantly” higher on both a one-year and two-year basis.

Bunnings is also seeing “positive” sales growth on a one-year and two-year basis. Sales in Officeworks were in line with the prior year.

WesCEF is expected to continue to benefit from elevated commodity prices and will continue to evaluate capacity expansion opportunities and progress the development of the Mt Holland lithium project.

Wesfarmers noted in its outlook statement that it continues to “actively manage” inflation, leveraging its scale and sourcing capabilities to mitigate the impact of cost increases. It pointed out that while general inflation remains elevated, prices for some inputs such as cotton, timber and plastic resins have moderated in recent months.

My thoughts on the Wesfarmers share price

Wesfarmers seems like a high-quality business and I’m impressed by how much it managed to turn things around in the second half. It’s very promising that it’s seeing sales growth at Bunnings and Kmart Group.

I think the long-term future of its lithium and health division are very promising as well. There’s a lot to like about Wesfarmers, including its dividend. I think it’s one of the leading ASX dividend shares.

I’d be very happy to have Wesfarmers shares in my portfolio, particularly as it’s down 20% in 2022 at the time of writing.

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