Down 23% in 2022, are ASX investors throwing Wesfarmers shares out with the bathwater?

The Wesfarmers Ltd (ASX: WES) share price is in the red this year. It has dropped by more than 20% amid a decline for many of the ASX’s shares and sectors.

The S&P/ASX 200 Index (ASX: XJO) as a whole has fallen by more than 10% this year.

There are plenty of retail names that have fallen noticeably in 2022. The JB Hi-Fi Limited (ASX: JBH) share price has fallen 15%, the Harvey Norman Holdings Limited (ASX: HVN) share price has declined 15%, the Nick Scali Limited (ASX: NCK) share price has dropped around 30%, the Super Retail Group Ltd (ASX: SUL) share price has fallen around 20%. And so on, you get the picture.

Why are ASX retail shares hurting?

Retail isn’t the only sector that’s hurting, but it’s facing a combination of factors that could be hurting the valuation.

Central banks are raising interest rates to try to tame inflation. Higher interest rates may be good for savers, but in investment terms, it meant to lower the valuation of assets. That’s the theory anyway.

This would explain the lower valuations that many assets are seeing.

But, retailers are facing a particular set of difficult circumstances. Inflation could increase the costs of retailers in areas like rent, wages, the supply chain, the production costs of the products themselves and so on. The higher interest rates and inflation could also mean that households decide to spend less on retail (and perhaps allocate their discretionary spending to ‘experiences’ after COVID impacts of the past two years).

The prospect of higher costs and lower revenue certainly wouldn’t be ideal. However, don’t forget that for some retailers they were cycling against lockdowns in the last six months of 2021, so open stores could be a positive for sales growth in the first half of FY23.

Why the Wesfarmers share price could be an opportunity

Fund manager Airlie Funds Management is a fan of Wesfarmers shares. Airlie holds shares of the owner of Bunnings, Kmart, Officeworks and Priceline in its portfolio.

Vinay Ranjan from Airlie has pointed out to Livewire that the business is a quality company with a strong balance sheet. Bunnings in particular is a standout to him. Commenting on the FY22 result and Bunnings, he said:

Bunnings, which is the core earnings driver of the business and the most important division, grew sales 9% in the second half. To give you some context, across a three-year period Bunnings sales have now grown about 35%, from FY19 to FY22, so it’s a pretty impressive result.

He and the Airlie team were impressed by the resilience of the retail businesses that Wesfarmers owns, but also noted the performance of some non-retail businesses. For example, Wesfarmers chemicals, energy and fertilisers (WesCEF) increased profit by 40% “on the back of some pretty strong commodity prices for ammonia, natural gas and fertilisers.”

One interesting takeaway was that earnings growth was below sales growth for Bunnings, suggesting that Bunnings is “investing a lot back into price and making sure the customer is getting some really good value.” Ranjan said that it’s important for the long-term strategic value for Bunnings, so it was “good to see”.

Wesfarmers share price rated as a buy

Ranjan said:

We’d be adding on any weakness. We are cognizant of the outlook for the consumer being a bit tougher and more challenging from here. But in saying that, if there is a business to own in this space, this is the one.

The brands they own, particularly Bunnings and Kmart, provide a lot of value to the customer and in an inflationary environment we expect those brands to outperform. They are real destination, highly resilient type businesses.

The post Down 23% in 2022, are ASX investors throwing Wesfarmers shares out with the bathwater? 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 positions in and has recommended Harvey Norman Holdings Ltd. and Super Retail Group Limited. The Motley Fool Australia has positions in and has recommended Harvey Norman Holdings Ltd., Super Retail Group Limited, and 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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