The Wesfarmers Ltd (ASX: WES) share price is in focus after a period of strong growth from the effects of COVID-19. But now, is the conglomerate a buy?
Wesfarmers is a diversified business with some major retail brands including Bunnings, Officeworks, Kmart, Target and Catch. However, it also has other lesser known divisions including its businesses in chemicals, energy and fertilisers, and industrial and safety products.
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What has been going on with the Wesfarmers share price?
Wesfarmers shares have risen by around 30% since the pre-COVID peak in February 2020.
However, Wesfarmers is down by around 9% from the 52-week high in August 2021, which was the latest reporting season.
In that result, Wesfarmers said that its continuing operations revenue rose 10% to $33.9 billion and underlying net profit after tax (NPAT) grew 16.2% to $2.4 billion. '
Total divisional earnings before tax and excluding significant items increased 23.7% to $3.54 billion. There were two divisions that drove profit significantly higher. Bunnings grew EBT by 19.7% to $2.2 billion and Kmart Group's EBT surged 69% to $693 million.
However, the August trading update showed year on year sales declines across all of its retail divisions. Bunnings sales were down 4.7%, Kmart and Target sales were down 14.3%, Catch's gross transaction value fell 8.5% and Officeworks sales were down 1.5%.
Management said that COVID-19 lockdowns were impacting the business and it was also cycling against strong sales in the prior corresponding period. In other words, Wesfarmers was finding it difficult to beat the sales in the corresponding times in the 2020 calendar year.
Recent trading
On 21 October 2021, Wesfarmers released a trading update at its annual general meeting (AGM). Recent trading can have an impact on investor thoughts regarding the Wesfarmers share price.
The company said that since August, its sales growth had improved in Bunnings, Officeworks and Catch, whilst results in Kmart and Target had continued to be impacted by temporary store closures.
In the key Bunnings division, its sales have been "robust" with sales growth from commercial customers partially offsetting the impact of lower consumer sales growth.
It said that it has seen strong sales growth in stores in affected areas that had started to re-open, which management said demonstrated pent-up demand in those areas.
Online sales have remained strong, despite capacity constraints in some online distribution channels. Over half of Officeworks' sales had been online in the year to date, whilst Kmart and Bunnings had online penetration of 21% and 6% respectively.
Is the Wesfarmers share price a buy?
Wesfarmers is focused on a number of strategic initiatives at the moment.
One priority is to develop a leading data and digital ecosystem which will help deliver better value and experiences to customers, as well as create new growth opportunities.
It's looking to increase its investments in its businesses for long-term growth. Most of that investment will be 'organic', but it is also open to acquisitions. Recent examples include the Mt Holland lithium project, the acquisition of Catch, and the bolt-on acquisitions for Bunnings such as Beaumont Tiles.
Most brokers have a neutral/hold rating on the business at the moment, such as UBS and Morgans.
Whilst Citi likes the attempt by Wesfarmers to buy Australian Pharmaceutical Industries Ltd (ASX: WES), it currently rates it as a sell with the valuation being a bit too expensive. The price target is $50.
However, Ord Minnett currently rates Wesfarmers as a buy with a price target of $64 because it thinks that 2022 could be another good year for some retailers.
