WES: Future Investments And Cost Management Will Drive Earnings Amid Market Uncertainty

Key Takeaways

• Enhanced digital and omnichannel investments, combined with portfolio optimisation and cost control, are supporting steady growth and operational resilience across core retail segments.
  
• Strategic expansion into health and wellness and sustainability initiatives is generating new revenue streams, strengthening brand loyalty, and reducing long-term risk.
  
• Rising cost pressures, limited international diversification, execution risks in new ventures, and reliance on cyclical sectors may constrain Wesfarmers' long-term earnings stability and growth.

Catalysts

Engages in the retail business in Australia, New Zealand, and internationally.

• Stronger investments and execution in omnichannel retail and digital capabilities across Bunnings, Kmart, and Officeworks (including expanded next-day delivery, app usage, and fulfillment centers) are increasing both online and in-store engagement, which should drive higher transaction volumes and support steady revenue and margin growth.
  
• Population growth and urbanisation in Australia are expected to fuel demand in home improvement and broader consumer goods, especially benefiting Bunnings and Kmart; Bunnings is poised for a sales and margin uplift as building sector activity recovers, accelerating core revenue and EBIT growth.
  
• Expansion into health and wellness through the Priceline Pharmacy network and digital health launches leverages demographic shifts and growing consumer focus on wellness, creating new recurring revenue streams and boosting long-term earnings.
  
• Disciplined portfolio actions (wind-down of Catch, divestment of non-core assets, strategic reinvestment in core/adjacent growth areas, and continuous cost control) reduce volatility, unlock capital for higher-return initiatives, and support normalized margin and EPS expansion.
  
• Investment in sustainability initiatives (100% renewable energy targets achieved at Bunnings and Officeworks, aggressive Scope 1 and 2 emissions reduction, expanded sustainable product ranges) is improving brand loyalty and lowering future ESG risk, which could reduce risk premia and improve long-term profitability.

Wesfarmers Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Wesfarmers's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.4% today to 6.7% in 3 years time.
• Analysts expect earnings to reach A$3.5 billion (and earnings per share of A$3.05) by about September 2028, up from A$2.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.5x on those 2028 earnings, down from 34.4x today. This future PE is lower than the current PE for the AU Multiline Retail industry at 34.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.09%, as per the Simply Wall St company report.

Wesfarmers Future Earnings Per Share Growth

Risks

• Persistent cost inflation across labour, supply chain, and rent was repeatedly cited as a key "cost of doing business" challenge for Wesfarmers' retail and industrial divisions; if not offset by productivity gains or pricing power, this could compress net margins and constrain long-term earnings growth.
  
• The group's heavy reliance on the Australian and New Zealand markets
• with little evidence of material international diversification (apart from the nascent Anko Global project)
• exposes Wesfarmers to local economic cycles, regulatory changes, and structural shifts, potentially leading to revenue and earnings volatility during local downturns.
  
• Ongoing execution risk in new verticals and growth platforms, such as the Health division's integration and the Covalent lithium venture, was acknowledged, with current operating losses (e.g., -$59 million in lithium, and limited short-term impact from healthcare initiatives); unsuccessful ramp up or failure to scale these investments could result in future write-downs, lower returns on invested capital, and negative EPS impact.
  
• Bunnings' and Kmart's sustained low price positioning leads to continuing price reinvestment ($200 million in Bunnings price spent in FY25) and margin pressure, while lack of clear operating leverage in Bunnings despite modest sales growth raises long-term concerns over efficiency ratios and ability to expand EBIT ahead of revenue growth.
  
• The company cited subdued demand from Australian SMEs and ongoing softness in the residential building sector, while also noting that key industrial earnings (e.g., WesCEF, Blackwoods) are highly exposed to volatile global commodity prices and cyclically high input costs (ammonia, gas); this results in unpredictable divisional revenue and profit, impacting group earnings stability and cash flows over time.

Valuation

• The analysts have a consensus price target of A$80.761 for Wesfarmers based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$100.0, and the most bearish reporting a price target of just A$58.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$51.6 billion, earnings will come to A$3.5 billion, and it would be trading on a PE ratio of 33.5x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of A$88.67, the analyst price target of A$80.76 is 9.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.