The Wesfarmers Ltd (ASX: WES) share price has sunk by more than 20% over the past six months. But could the next six months offer hope for this S&P/ASX 200 Index (ASX: XJO) retail share?
While Wesfarmers may not be an often-mentioned name in a typical Aussie household, plenty of the businesses within the Wesfarmers stable are famous retailers in the country.
Some of the businesses that Wesfarmers operates include Bunnings, Kmart, Target, Officeworks, Catch, and Priceline. The Priceline name is a recent addition after the acquisition of Australian Pharmaceutical Industries (API).
However, Wesfarmers also has other businesses in areas like safety, chemicals, energy, fertilisers, lithium, and other industrial sectors.
Latest outlook according to Wesfarmers
Wesfarmers will report its FY22 results on 26 August during the upcoming earnings season.
However, earlier this year Wesfarmers said that the Australian economy was in a favourable shape, with strong employment and high levels of accumulated household savings.
It is continuing to "actively manage" increasing inflationary pressures and it said it will "leverage its scale" to mitigate the impact of rising costs.
Specifically in relation to its retail businesses, Wesfarmers said it will increase its focus on price leadership. Time will tell what this means for margins and volume.
For example, Wesfarmers said in a recent presentation that Bunnings is aiming to deliver more value. It will "go harder on lowest prices that matter the most", but be disciplined about it.
The hardware business is leveraging its volume to purchase at the lowest cost. Its own-brand products can provide "greater value" in selected categories.
Bunnings is the key business for Wesfarmers because it generates the lion's share of operating profit. Therefore, it can have the biggest impact on the Wesfarmers share price.
Growth prospects in FY23
Bunnings sees opportunities to grow in various ways. For households, it's expanding in-room furniture and storage, garden and décor, and kitchen and bathroom. It has identified growth opportunities with in-home services, pet 'durables', and recreation.
Wesfarmers is also taking aim at commercial customers. Beaumont Tiles and Tool Kit Depot are two growth opportunities.
With Kmart Group, Wesfarmers notes that it's uniquely positioned in this inflation environment to extend its low price leadership. The full-year sales benefit of store conversions will be seen in FY23. It's also looking to grow online sales, reduce costs, and convert revenue growth into profit growth.
It's a similar story for Officeworks. It wants to offer the best value, become more efficient, and grow the profit.
Wesfarmers Health is the new division that includes Priceline, Soul Pattinson Chemists, Clear Skincare Clinics, and so on. The company points out that healthcare is an important, large sector with long-term growth tailwinds. The population aged over 65 in Australia is expected to double to 8.9 million by 2060.
The company also notes that customers are becoming more interested in health and wellness, particularly preventative health.
Broker thoughts on the Wesfarmers share price
Macquarie currently rates Wesfarmers as underperform, which is essentially like a sell rating. The price target is $43.30, implying a single-digit decline over the next year. The suggestion is that it will be a struggle for Wesfarmers to grow sales, with households changing their spending to services.
According to Macquarie, the Wesfarmers share price is valued at 22 times FY23 estimated earnings.
The broker Ord Minnett is also negative on the business. It has a 'lighten' rating and a price target of $41.20, suggesting a high single-digit decline over the next year.
While it thinks the decline largely reflects the worsening situation for the retailer, it decided to reduce its expectations.
