Shares in Wesfarmers (ASX: WES) were moving sideways at noon after bouncing lower at the open, with the market appearing to be unimpressed by the conglomerate’s litany of updates, including Bunnings, Anko store rollout plans and future outlook projections.
While it's been a tough few years for Australian consumers due to escalating cost-of-living pressures, Wesfarmer powerhouse brands Bunnings, Kmart, Target, Officeworks, and Priceline – which are directly exposed to the consumer discretionary sector - continue to outperform.
With consumers likely to remain value-conscious as living costs rise, Wesfarmers CEO Rob Scott reminded shareholders that its cost-conscious brands will help the stock go on delivering superior returns well into the future.
Top quartile returns
Scott also reminded investors that Wesfarmers’ total shareholder return since listing in 1984 - relative to total shareholder returns to the broader market – has repeatedly been top quartile.
“We are singularly focused on providing products and services that are making life more affordable and more accessible for Australian households and businesses, and I really wouldn’t underestimate the power of that,” Scott told investors at a strategy day today.
Despite recent interest rate cuts, Scott noted that many lower-income households are still doing it tough, with many making deliberate choices to spend less.
But on the flipside, Scott also pointed to other customer cohorts, particularly homeowners without mortgage stress, who are continuing to spend.
“… we see these trends across our retail businesses,” said Scott.
In addition to investing capital in its existing portfolio, Scott said future acquisitions were also on the cards and pointed to underlying balance sheet strength to invest longer term.
Anko and Atomica brand growth
Portfolio expansion is expected to include opening more Anko-branded stores overseas, to help to offset sluggish consumer demand.
A further store rollout follows a store opening in Manila last year under the name Anko - which is the home brand for Kmart.
“Together with our joint venture partner, we have agreed to open a number of new stores this year to further test the proposition,” Scott said.
While Anko has significant scale and agile design capabilities, Scott said the brand’s products were also resonating with customers globally from furniture and home in Canada to wooden toys in the U.S. and its broad general merchandise range in the Philippines.
Anko aside, in a bid to capitalise on the booming demand for beauty and skincare products, Wesfarmers is also looking to develop its Atomica brand.
Scott told investors that the format was resonating with shoppers, with many overseas brands keen for shelf space at Atomica stores, which are rebranded Priceline shops.
Bunnings grows its trade footprint
During today’s investor day update, Bunnings managing director Mike Schneider told the market that new categories are continuing to expand, with the commercial business now playing a critical role in driving of the hardware giant’s growth.
While business-to-business sales now represent about 38% of Bunnings’ total revenue, Schneider reminded the market that Bunnings has barely scratched the surface of this sector’s total addressable market.
Bunnings plans leverage its frame and truss Beaumont tiles businesses for its trade customers.
“It’s fragmented, and it’s growing, and we’ve lots of runway and opportunities to participate in this segment more deeply, we have clear plans to grow across each of our three commercial customer segments,” said Schneider.
“Trades are our largest commercial customer group, and value our convenience store network and broad product range. And here, Tool Kit Depot supports the Bunnings offer by enabling a deeper and wider range of trade quality brands,” he said.
Meanwhile, in addition to new categories like cleaning and pet goods, Bunnings is also planning to launch a new exclusive pet food range.
Kmart’s to leverage digital competitive advantage
Aleks Spaseska, who took over as head of both Kmart and Target chains in April, is placing greater emphasis on the discount retailer’s digital engagement as a growing source of competitive advantage.
Spaseska expects to double the business over the long term after the business reached the watershed $10 billion in sales and $1 billion in earnings on a rolling 12-month basis.
Instrumental is that growth, adds Spaseska, is the large and growing digital audience that’s highly engaged with Kmart.
“A growing source of competitive advantage is our digital engagement with over 600 million sessions per annum and the number of monthly active users on the Kmart app doubling over the last year to over 1.3 million,” she said.
“Gen Z and Alpha are the fastest growing customer segments, and over the next few years, will come to represent a material portion of total consumer spend. Engaging these customers through the evolution of product offer in shopping experience is a strategic priority.”
Spaseska expects Kmart and Target to collectively capture a larger share of the addressable market than either brand could hope to capture alone.
Could Wesfarmers hit $100?
Now seen as a solid defensive play, Wesfarmers' share price is up 25% over one year and has more than doubled over the past five years.
Trading at a 31.4x forward earnings multiple, Macquarie believes Wesfarmers is priced for its quality.
Assuming a reigniting of consumer spending on the back of interest rate cuts can deliver margin expansion, Wesfarmers' share price could conceivably test the psychological $100 mark later this year.
However, despite hitting a sweet spot with its consumer discretionary brands, Wesfarmers continues to struggle within other parts of its portfolio.
At currently subdued market pricing, its 50% interest in the Mount Holland lithium project, Covalent, is expected to deliver losses of around $60 million.
Wesfarmers has a market cap of $94 billion, making it a top 10 ASX company; the stock's share price is up 12% in the last month.
The stock appears to be in a strong bullish trend, confirmed by multiple indicators.
Consensus is Moderate Sell.
The share price was down 0.58% mid-afternoon.
This article does not constitute financial or product advice. You should consider independent advice before making financial decisions.