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Why Wesfarmers’ shares are up 16% for the year

Shares of Wesfarmers (ASX: WES), the $40-billion conglomerate of retail, resource and insurance companies, have risen nearly 17% on an adjusted basis since October 2011, while the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up about 8% on an adjusted basis over the same period. What’s the story?

Success despite challenges

In a broad sense, Aussie consumers have been reluctant to spend, making for a challenging environment for some retailers. For instance, in a recent article highlighting trends in consumer confidence, Bloomberg reported that consumers “spent 1.5% less on household goods” in August. What’s more, many savvy consumers are roving the internet for better values on a host of consumer goods. As Reuters recently pointed out, Australia’s “strong currency is encouraging shoppers wielding tablets and smartphones to hunt down bargains overseas.”

While the company has a long and varied history, Wesfarmers’ earnings have in recent years become overwhelmingly concentrated in retail. Consider that Coles, the supermarket chain acquired in 2007, represents 37% of Wesfarmers’ earnings before taxes, while Bunnings and Officeworks account for another 25%, and Target and Kmart another 14% together. That’s 76% of Wesfarmers’ earnings before taxes in total. The insurance and resources segments, accounting for less than 1% and 12% respectively, are much smaller; the company’s Chemicals, Energy and Fertilisers and Industrial and Safety businesses account for the remaining 12%.

Despite this concentration in a challenging sector, Wesfarmers posted strong fiscal 2012 results, with record profits exceeding $2.1 billion. Growth was significant across the company’s segments, with Coles a particularly strong performer. Before-tax earnings at the grocery retailer rose 16.3%. Same-store sales at Coles rose 3.7%, and it  also opened 19 new supermarkets, 35 liquor stores and 10 Coles Express stores during fiscal 2012.

The difficult retail environment weighed on Target, with same-store sales slipping 2.1% and operating revenues down 1.2%.

Outperformed by Woolies

By comparison, shares of Woolworths Limited (ASX: WOW) are up about 25% on an adjusted basis since October 2011, with an overall sales increase of 4.3% and 7.5% growth in earnings before interest and tax. Woolworths is currently trading at a slightly lower P/E ratio of about 16.7 versus Wesfarmers’s P/E of around 18.8.

Of course, whether either company can continue to post strong results remains to be seen as the broader economy encounters continued uncertainty and turbulence.

What the future holds for Wesfarmers

Despite threats to its core businesses, Wesfarmers’ blue chip status and long operating history are worth bearing in mind. To see what the future holds for Wesfarmers, stay tuned for the company’s first quarter 2013 results, to be released Thursday, October 25.

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Motley Fool writer/analyst Catherine Baab-Muguira doesn’t own shares in any company mentioned in this article. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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