2022 was brutal for Wesfarmers shares. What now?

The Wesfarmers Ltd (ASX: WES) share price had a tough time in 2022 – can things improve this year?

For investors that haven’t heard of this company, it’s the owner of a number of different Australian businesses such as Bunnings, Kmart, Target, Priceline and Officeworks. It also has a chemical, energy and fertiliser division (called WesCEF) and an industrial and safety segment.

In 2022, the Wesfarmers share price dropped by over 22%, compared to the S&P/ASX 200 Index (ASX: XJO) which fell by around 7%.

What went wrong in 2022?

Aside from the FY22 result and the important numbers within that, the biggest company-specific thing that happened during 2022 was the completion of the acquisition of the Australian Pharmaceutical Industries (API) business.

This API business, which owns Priceline, Soul Pattinson Chemists and Clear Skincare Clinics, will “form the basis of a new healthcare division of Wesfarmers and a base from which to invest and develop capabilities in the health and wellbeing sector.”

Wesfarmers says that its capabilities in retail distribution, a strong balance sheet and willingness to invest in businesses for growth over the long term can help.

In terms of the FY22 report, Wesfarmers said that revenue grew by 8.5% to $36.8 billion and underlying net profit after tax (NPAT) dropped 2.9% to $2.35 billion. While Kmart Group saw earnings before tax (EBT) plunge 39.7% to $418 million, Bunnings EBT grew 0.9% to $2.2 billion and WesCEF EBT jumped 40.6%.

The company noted that the first half of FY22 was affected by COVID-19, with almost half of the stores subject to trading restrictions or closed. This was a key factor in Kmart Group earnings.

How could 2023 play out?

The company has said that the Australian economy is starting from a “strong base” with low unemployment and high levels of household savings, but the “effects of inflation and higher living costs are placing pressure on parts of the economy, including household budgets.”

Management believes that the company’s retail businesses are “well positioned” as cost of living pressures impact household budgets and value becomes “increasingly important to customers.” Management believes that Kmart and Bunnings can excel during this period as a key part of their offering is providing good value products.

While the first half of FY23 was the last six months of 2022, we won’t learn about it until February 2023, so the Wesfarmers share price could be influenced by that.

Management said that Australian retail trading conditions have remained “robust” and the managing director said at the annual general meeting (AGM) that he had been “pleased” with sales in FY23 to date. Consumers are becoming more price sensitive.

Bunnings’ overall sales growth in FY23 to October had been “resilient”. Kmart and Target sales growth has been “pleasing”, even when adjusting for lockdown impacts.

However, the company warned that “elevated supply chain costs, rising wages and the higher cost of utilities, together with the lower Australian dollar, will impact the Group’s businesses in the 2023 financial year.”

But, Wesfarmers suggested it’s well placed compared to its competitors to manage costs and “will continue to leverage the benefits of scale, sourcing capabilities and employment brand.”

Foolish takeaway

While it’s impossible to say for sure what the Wesfarmers share price will do in 2023, I think the 24% fall over the past year means it’s now noticeably better value. Commsec profit projections put the company at under 21 times FY23’s estimated earnings.

The post 2022 was brutal for Wesfarmers shares. What now? 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. 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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