Wesfarmers (ASX:WES) share price on watch after strong profit growth and $2.3bn capital return

This retail giant had a strong year and is rewarding shareholders…

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The Wesfarmers Ltd (ASX: WES) share price will be on watch on Friday.

This follows the release of the conglomerate's full year results this morning.

Wesfarmers share price on watch after delivering strong profit growth

  • Revenue from continuing operations up 10% to $33,941 million
  • Earnings before interest and tax (EBIT) from continuing operations up 18.8% to $3,776 million
  • EBIT (after interest on lease liabilities) up 20.7% to $3,550 million
  • Net profit after tax rose 16.2% to $2,421 million
  • Operating cash flows down 25.6% to $3,383 million
  • Fully franked full year dividend of 178 cents per share, up 17.1% year on year
  • Proposed $2.3 billion or $2.00 per share capital return to shareholders

What happened in FY 2021 for Wesfarmers?

Wesfarmers was a very positive performer in FY 2021, delivering a 10% increase in revenue and an 18.8% jump in EBIT from continuing operations. This appears to be in line with expectations, which could bode well for the Wesfarmers share price today.

The key drivers of this growth were its Bunnings and Kmart Group businesses. For the 12 months, Bunnings delivered a 19.7% increase in earnings to $2,185 million and Kmart Group achieved a 69% increase in earnings to $693 million. This was supported by a 7.6% increase in Officeworks earnings and offset slightly by a 2.5% earnings decline by the WesCEF business.

Management advised that Bunnings' strong growth reflects continued execution of its strategic agenda, the resilience of its operating model, and its capacity to adapt to changing customer needs

Whereas Kmart Group's positive performance was underpinned by the conversion of Target stores into Kmart stores, higher sales, lower clearance costs, and improvements in the cost of doing business.

This strong form allowed the Wesfarmers Board to declare a fully franked final dividend of 90 cents per share. This brought its full year dividend to 178 cents per share, up 17.1% year on year.

But the shareholder returns aren't stopping there. Potentially giving the Wesfarmers share price an additional boost today was news that the Board is recommending a return of capital of 200 cents per share to shareholders.

The company notes that this distribution will ensure a more efficient capital structure for the company while maintaining balance sheet capacity to take advantage of value-accretive opportunities as they arise.

What did management say?

Wesfarmers' Managing Director, Rob Scott, commented: "While COVID-19 had a significant impact on operations during the year, the Group's businesses maintained their focus on building deeper customer relationships and trust."

"Bunnings, Kmart Group and Officeworks delivered strong sales and earnings growth for the year. While customer demand remained resilient, sales growth in Bunnings, Officeworks and Catch moderated from mid-March as the businesses began to cycle elevated demand following the onset of COVID-19 in the prior year. Pleasingly, sales growth from mid-March remained strong on a two-year basis across all of the Group's retail businesses."

Mr Scott also revealed that its online businesses performed strongly during the year, with online sales now accounting for almost 10% of sales.

He said: "Investment in data and digital capabilities accelerated, and the Group commenced the development of a data and digital ecosystem that will enable a more seamless and personalised customer experience across the retail businesses. Digital engagement across all businesses continued to increase and total online sales across the Group, including the Catch marketplace, increased to $3.3 billion."

What's next for Wesfarmers?

One thing that could weigh on the Wesfarmers share price today was its softer start to FY 2022.

The company notes that Bunnings' sales financial year to date have declined 4.7% on the prior corresponding period. This reflects solid growth from commercial customers, offset by a decline in consumer sales as the business cycled elevated demand in the prior period.

It is a similar story for the Kmart Group business, with combined Kmart and Target sales down 14.3% financial year to date. This reflects the significant impact of COVID-19 restrictions, including government-mandated temporary store closures across a number of regions. It notes that since the beginning of the year and in mid-August almost 50% of stores were closed due to lockdowns. The Catch business has also seen gross transaction value decline 8.5% thus far in FY 2022.

Finally, Officeworks has been a relatively better performer with sales down just 1.5% financial year to date.

No guidance has been given for the year ahead, but management remains positive on the company's long term prospects.

It commented: "The Group's strong balance sheet and portfolio of cash-generative businesses with market-leading positions make it well positioned to withstand a range of economic conditions and deliver satisfactory shareholder returns over the long term."

"The Group will continue to develop and enhance its portfolio, building on its unique capabilities and platforms to take advantage of growth opportunities within existing businesses and to pursue investments and transactions that create value for shareholders over the long term," it concluded.

Wesfarmers share price performance

The Wesfarmers share price has been in fine form in 2021. Since the start of the year, the company's shares are up 24%. This is double the return of the ASX 200 over the same period.

Motley Fool contributor James Mickleboro 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 owns shares of and has recommended 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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