Down almost 30% in FY22: What’s worrying investors about Wesfarmers shares?

Why did the Bunnings operator fall so hard in FY22?

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Key points

  • After such a strong FY20 and FY21, the Wesfarmers share price came back down to earth in FY22 
  • Net profit after tax went backwards in the first half of FY22 
  • However, the company did acquire API to start a new health division 

The Wesfarmers Ltd (ASX: WES) share price had a tough time in FY22 as it dropped approximately 30%.

Wesfarmers benefited in FY20 and FY21 from big boosts with DIY projects at home, as well as with technology to learn, work and entertain ourselves at home.

However, that boom has now faded as the Australian economy and ASX share market enter a new phase of higher energy costs, broadly elevated inflation and rising interest rates.

While the latest RBA interest rate rise of 50 basis points to 1.35% came after the end of FY22, it marks the second month in a row of 0.50% increases, which the market was largely expecting. However, higher interest rates are supposedly meant to pull down on asset values.

Let’s look at some of the highlights during FY22, which finished last week.

API acquisition

After seeing off a challenge from Woolworths Group Ltd (ASX: WOW) to buy Australian Pharmaceutical Industries (API), Wesfarmers finally completed its acquisition of the pharmacy and healthcare business at the end of March 2022.

Wesfarmers describes API as “a leading distributor of pharmaceutical goods and operates a portfolio of complementary wholesale and retail businesses.” It operates the Priceline Pharmacy, Soul Pattinson and Pharmacist Advice brands. API also operates Clear Skincare clinics, a provider of skin treatments, laser hair removal and non-invasive cosmetic procedures and also the manufacturer of pharmaceutical and personal care products.

The total cash consideration paid to API shareholders for the acquisition was $774 million.

Why was the deal attractive to Wesfarmers? The Wesfarmers managing director Rob Scott said:

API will be the foundation business of our new health division as we develop capabilities and invest in the growing health, wellbeing and beauty sector. We see opportunities to strength the competitive position of API and its partners, by investing in expanding product ranges, improving supply chain capabilities and enhancing the online experience for customers.

Sales and earnings decline

The Wesfarmers FY22 half-year result showed that its financial numbers had started to go backwards.

Excluding significant items, revenue was down 0.1% to $17.8 billion and net profit after tax (NPAT) fell 14.2% to $1.2 billion.

While these numbers were still impressive compared to pre-COVID times, it is said that share prices follow earnings. If the NPAT is going down, that makes it harder for the Wesfarmers share price to grow (or even stay at the same level).

The company explained the FY22 first half was disrupted by store closures and trading restrictions due to COVID-19, pointing to around 20,000 store days where stores were completely closed to customers. It also spent money on supporting its team members.

Wesfarmers also noted that it intended to increase its focus on price leadership and is “well positioned to continue to provide customers with great value on everyday products as rising cost-of-living pressures impact household budgets.” Time will tell what impacts this has on profit margins.

Business plans

Investors recently had the chance to look at an investor presentation by Wesfarmers about how it planned to grow each segment. Seeing growth ideas could help sentiment about the Wesfarmers share price.

For example, with Officeworks, it plans to evolve the core offering while adding new customer segments and services, such as working with schools.

With Kmart, it wants to improve the online customer experience and grow online profit. It suggested that ongoing cost of living pressure will drive customers to look for more ‘everyday value’ more frequently, which Kmart could provide. Target is being repositioned as a digitally-led retailer.

With Bunnings, Wesfarmers has plans to upgrade, expand or open 15 to 20 new Bunnings warehouses and small formats per year. It’s also ‘evolving’ the supply chain to support online fulfilment and commercial growth. It also plans to roll out Tool Kit Depot and grow Beaumont Tiles. In terms of product prices, Bunnings said that it wants to deliver more value and “go harder” on the lowest prices that matter the most.

Wesfarmers share price snapshot

Over the past month, the Wesfarmers share price has fallen 8%.

Motley Fool contributor Tristan Harrison 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 has positions in and has recommended Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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