Australian Urbanization And Digital Supply Chains Will Boost Sustainable Retail

Key Takeaways

• Scaling AI and digital supply chain innovations could significantly boost operational efficiency and margins across divisions, well beyond current market expectations.
  
• Structural growth in key sectors and leadership in sustainability initiatives position Wesfarmers for compounding revenue and sustained competitive margin advantages.
  
• Rising costs, digital competition, demographic challenges, and heavy dependence on key retail divisions threaten profitability and stability, while new ventures present execution and return risks.

Catalysts

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

• Analyst consensus broadly expects productivity improvements and division transformations to modestly lift margins, but this likely understates the impact of upcoming AI and digital supply chain advancements, which could deliver outsized gains in operational efficiency and margin expansion groupwide as these technologies are scaled over the next several years.
  
• While consensus focuses on lithium as a future growth driver, the narrative underplays Wesfarmers' optionality around rapid expansion at Mount Holland; with first product now achieved and approvals for capacity doubling underway, a medium-term lithium market rebound could see Wesfarmers materially outstrip consensus earnings and return on capital expectations from this asset alone.
  
• Structural growth in Australia's urban population and rising household formation is set to deliver a powerful, long-duration tailwind to Bunnings, Kmart, and Officeworks, enabling compounding revenue growth and driving further leverage over a largely fixed cost base.
  
• Wesfarmers is uniquely positioned to benefit from a shift toward sustainable products and practices, with its early achievement of 100% renewable energy targets across key divisions and advanced decarbonization initiatives, which should both boost brand loyalty and reduce long-run regulatory and input cost risks, supporting higher net margins than peers.
  
• Accelerating growth in the Health division, fueled by network expansion, exclusive and private-label brands, and further digital penetration via telehealth and pharmacy services, is likely to create a high-growth, high-margin revenue stream with potential to rival retail segment profitability and stabilize group earnings through the cycle.

Wesfarmers Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Wesfarmers compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Wesfarmers's revenue will grow by 5.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 6.4% today to 6.6% in 3 years time.
• The bullish analysts expect earnings to reach A$3.5 billion (and earnings per share of A$3.12) 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 price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 40.4x on those 2028 earnings, up from 36.0x today. This future PE is greater than the current PE for the AU Multiline Retail industry at 35.8x.
• 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 8.08%, as per the Simply Wall St company report.

Wesfarmers Future Earnings Per Share Growth

Risks

• Rising labor, compliance, and sustainability costs-reinforced by tightening regulations and consumer scrutiny-are likely to place persistent upward pressure on Wesfarmers' cost base, creating risk to net margins and long-term earnings growth.
  
• An ongoing transition to e-commerce raises the threat of losing market share to more advanced digital competitors, both domestic and global, which could constrain top-line revenue growth for Bunnings, Kmart, and Officeworks and require high levels of IT investment that dilute profitability.
  
• Demographic headwinds such as Australia's aging and slowing population, highlighted in the text's moderation of consumer demand and soft B2B sales, are poised to structurally cap long-term sales growth across Wesfarmers' core domestic retail businesses.
  
• Overreliance on Bunnings and Kmart is evident as these divisions continue to be key earnings drivers, exposing Wesfarmers to sector-specific slumps or intensified competition, which could induce earnings volatility and pressure on overall group returns.
  
• New ventures in lithium, health, and retail media, while touted as future growth areas, carry significant execution and capital allocation risks; the text notes start-up losses and subdued commodity prices in lithium and uncertainty on profitability timelines, potentially eroding return on invested capital and diluting group earnings quality.

Valuation

• The assumed bullish price target for Wesfarmers is A$100.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Wesfarmers's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• 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 bullish analysts, you'd need to believe that by 2028, revenues will be A$53.8 billion, earnings will come to A$3.5 billion, and it would be trading on a PE ratio of 40.4x, assuming you use a discount rate of 8.1%.
• Given the current share price of A$92.84, the bullish analyst price target of A$100.0 is 7.2% higher. 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.