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Wesfarmers (ASX:WES) share price tumbles despite strong half year profit growth

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The Wesfarmers Ltd (ASX: WES) share price has tumbled lower following the release of its half year results.

In morning trade, the conglomerate’s shares are down 3% to $52.50.

How did Wesfarmers perform in the first half?

For the six months ended 31 December, Wesfarmers reported a 16.6% increase in revenue to $17,774 million.

This was driven by a 24.4% increase in Bunnings revenue to $9,054 million, a 23.7% jump in Officeworks revenue to $1,523 million, a 9% lift in Kmart Group revenue to $5,441 million, and a 6.6% increase in Chemicals, Energy and Fertilisers revenue.

An improvement in its earnings before interest and tax (EBIT) margin from 11.3% to 12% led to half year EBIT growing 23.2% to $2,137 million.

On the bottom line, Wesfarmers delivered a 25.5% increase in net profit after tax (excluding significant items) to $1,414 million. Including significant items, net profit grew 23.3% to $1,390 million.

Also growing very strongly was the company’s free cash flow, which increased 89% over the prior corresponding period to $1,964 million.

This ultimately allowed the Wesfarmers board to declare a fully franked interim dividend of 88 cents per share. This is up 17.3% on last year’s interim dividend.

The company advised that this dividend takes into account available franking credits, its balance sheet position, credit metrics, and cash flow generation. It also preserves the flexibility to manage continued uncertainty associated with COVID-19, and to take advantage of value-accretive growth opportunities, if and when they arise.

What drove its strong growth?

Wesfarmers’ Managing Director, Rob Scott, revealed that its performance was driven by strong sales and earnings growth across its retail businesses. This was supported by an improvement in the performance of its Industrial and Safety businesses during a period of continued disruption and uncertainty.

Mr Scott said: “Bunnings, Kmart Group and Officeworks delivered strong trading results for the half, reflecting their ability to adapt to changing customer preferences and provide a safe environment for customers and team members.”

“In line with Wesfarmers’ objective of delivering superior and sustainable long-term returns, the retail divisions continued to invest in building deeper customer relationships and trust by providing greater value, service and convenience for customers during a period in which many Australian households faced significant challenges and uncertainty,” he added.

Mr Scott also revealed that the company experienced strong online sales growth during the half.

He explained: “Pleasing progress on the Group’s data and digital agenda in recent years supported strong online sales growth and digital engagement during the half. Total online sales across the Group more than doubled for the half, excluding Catch. Including the Catch marketplace, online sales of $2.0 billion were recorded for the half.”

How does this compare to expectations?

As I mentioned here last month, Goldman Sachs was forecasting revenue of $17,616.2 million and EBIT of $1,831.8 million.

Whereas Wesfarmers outperformed these forecasts with revenue of $17,774 million and EBIT of $2,137 million. 

So, with the Wesfarmers share price tumbling lower this morning, it appears as though some investors may be concerned with what’s to come in the second half.

Outlook

No guidance was given for the remainder of FY 2021, but management spoke positively about its outlook.

It said: “Economic conditions in Australia have recovered strongly and the outlook is more positive, subject to future COVID-19 risks. While the continued impact of COVID-19 on customer demand and operations presents significant uncertainty, the Group’s portfolio of cash-generative businesses with leading market positions remains well-placed to deliver satisfactory shareholder returns over the long term.”

Wesfarmers also revealed that retail sales have been strong during January and February.

However, as with Coles Group Ltd (ASX: COL), its growth is expected to moderate from March as it begins to cycle the initial sales surge caused by COVID-19.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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