Buying Wesfarmers shares? Here’s why the company says Bunnings can continue to outperform

Wesfarmers Ltd (ASX: WES) shares are heavily influenced by the performance of the Bunnings business.

In FY22, which is the 12 months to 30 June 2022, Bunnings generated $2.2 billion of earnings before tax (EBT). This compares to $505 million of EBT in Kmart and Target, $540 million in Wesfarmers chemical, energy and fertilisers (WesCEF) and $181 million generated by Officeworks. There are smaller divisions as well, which contribute to the company.

As you can see, Bunnings is by far the biggest profit generator for Wesfarmers.

With how much revenue and earnings Bunnings has generated since the start of COVID-19, investors may be wondering if this is the best that things are going to get.

Management confident about Bunnings

There has been a change in how people view their homes and this could help Bunnings.

In relation to a question from Richard Barwick of CLSA Australia, asking whether there might be a slump in sales and earnings in FY23 on the back of an outstanding period of growth for the Bunnings Group, managing director Michael Schneider said:

I think there has been a structural shift in the way that our customers think about their home. It’s become a workplace, it’s become a classroom, it’s become somewhere that you know, you’re spending more periods of time. When you’re working from home two or three days a week, there is more wear and tear on the house and you’re seeing more things to do.

We saw also that over the last few years, customers have actually really developed quite a new array of DIY skills. We’ve been able to bring you products and services and categories into the market to be able to meet those needs.

Furthermore, Schneider discussed how Bunnings is positioned in terms of demand on the commercial side of the business, the area focused on supplying builders.

The type of construction that we’re focused on is the smaller builder, they’re not managing some of these bigger projects where you’ve seen some building companies get themselves into a bit of trouble.

So I think there’s a lot of opportunity for us to pursue there and the whole build strategy that the team have sort of built in the way we’re sort of thinking about that through the different segments are Bunnings and also TKD, and Beaumont Tiles I think gives us some great opportunity to really earn the right to be chosen by customers in that space.

What else have we learned about Bunnings?

Bunnings said that its EBT only grew by 0.9% over FY22, but it grew by 3.7% to $945 million in the second half.

It still achieved an incredibly high return on capital of 77.2% in FY22, which shows it earns very high profitability on money invested into the business. It’s a real crown jewel for Wesfarmers shares.

In terms of a trading update, Wesfarmers said retail trading conditions remained “robust” through the first seven weeks of FY23. Bunnings saw continuing “positive sales growth” on a one-year and two-year basis.

Looking at the Bunnings outlook when Wesfarmers released its FY22 result, the company said:

Bunnings continues to be well positioned for a range of market conditions, and will benefit from the diversity of its business, focus on necessity products and strength of its offer across consumer DIY and commercial markets.

The demand outlook across consumer and commercial is supported by a solid pipeline of renovation and building activity, as well as incremental DIY growth opportunities as customers continue to focus on maintaining and improving their homes.

Bunnings continues to manage operating complexities from COVID-19 and supply chain disruptions, as well as navigate inflationary pressures, with a clear focus on cost discipline, driving productivity improvements and delivering market-leading value for customers.

Wesfarmers share price snapshot

Over the past month, Wesfarmers shares have dropped 1%. They are down 22% this year to date and 16% over the past 12 months.

On Thursday, they closed 2.7% higher at $46.97.

The post Buying Wesfarmers shares? Here’s why the company says Bunnings can continue to outperform appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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