Digital Transformation And Urbanization Will Drive Secular Retail Expansion

Key Takeaways

• Division-wide digital transformation, AI, and fulfillment automation are expected to drive lasting improvements in margins, capital returns, and group profit diversification.
  
• Growth from lithium operations, international Anko brand expansion, and data-driven retail media initiatives could provide upside to revenue and earnings beyond market expectations.
  
• Heavy dependence on core retail brands, digital transition challenges, and rising operational costs expose Wesfarmers to earnings volatility and margin pressures amid evolving market dynamics.

Catalysts

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

• Analyst consensus expects productivity initiatives and division-wide transformation to expand margins, but market is underestimating the scale and duration-ongoing digitization, AI-driven supply chain optimization, and the ramping of automated fulfillment centers could drive multi-year step changes in both net margins and returns on capital.
  
• Analysts broadly agree that lithium through the Covalent JV is a long-term driver, but are conservative on timing and scale; with commissioning tracking ahead, first product on track for mid-2025, and a structurally advantaged cost position at Mt Holland, Wesfarmers could deliver earlier and higher-than-expected ramp in both revenue and earnings from tight global lithium supply and accelerating battery demand.
  
• The rapid growth and scaling of the Anko brand internationally, both via wholesale partnerships with North American and European retailers and direct-to-consumer Asian store rollouts, provides a significant new earnings stream not reflected in consensus, with the potential to materially increase group revenue and drive profit diversification.
  
• Population growth and urbanization in Australia are stronger tailwinds than consensus assumes-continued network expansion for Bunnings, Kmart, and Officeworks, coupled with enhanced omnichannel and next-day delivery capabilities, will accelerate same-store sales growth while expanding total addressable market, positively impacting top-line sales and market share.
  
• The retail media, data monetization, and marketplace businesses have the ability to unlock high-margin, platform-like revenue streams leveraging unparalleled first-party data and scale; as these initiatives mature, they could generate hundreds of millions in incremental earnings at high margins, driving accelerated EPS and net margin expansion beyond analyst expectations.

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 5.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 5.8% 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$3.08) by about August 2028, up from A$2.6 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 37.0x on those 2028 earnings, down from 40.4x today. This future PE is lower than the current PE for the AU Multiline Retail industry at 43.9x.
• 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 8.04%, as per the Simply Wall St company report.

Wesfarmers Future Earnings Per Share Growth

Risks

• The accelerating shift toward e-commerce and intensifying competition from global players like Amazon could erode market share and reduce traffic in Wesfarmers' core brick-and-mortar retailers such as Bunnings and Kmart, putting long-term pressure on revenue growth.
  
• The group's heavy reliance on Bunnings and Kmart Group for earnings heightens its vulnerability to downturns or disruptions in home improvement and discount retail markets, increasing the risk of earnings volatility if these key divisions underperform.
  
• Slower-than-expected diversification into high-growth or digital sectors, as evidenced by the wind-down of Catch and ongoing investment needs in new digital initiatives, limits Wesfarmers' future revenue streams and could constrain long-term earnings growth if not successful.
  
• Execution risk and potential cost overruns in large, capital-intensive projects such as the Covalent lithium refinery threaten return on invested capital and could depress net margins, especially if technical or market challenges persist amid low lithium prices or global oversupply.
  
• Ongoing margin pressure from increased wage inflation, labor shortages, and the necessity of capital investments to meet shifting consumer preferences for sustainability are likely to increase operational costs and weigh on profitability over the long term, limiting the group's ability to expand net margins.

Valuation

• The assumed bullish price target for Wesfarmers is A$90.3, 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$90.3, 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$52.6 billion, earnings will come to A$3.5 billion, and it would be trading on a PE ratio of 37.0x, assuming you use a discount rate of 8.0%.
• Given the current share price of A$92.47, the bullish analyst price target of A$90.3 is 2.4% 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.