Wesfarmers Ltd (ASX: WES) stock has performed well overall in 2023, though it has been falling in recent days.
In the 2023 calendar year to date, it's up around 16%, though it's down 1.7% since 25 September 2023 after consecutive days of declines.
As a reminder, this is the business that owns Bunnings, Kmart, Officeworks, Priceline and plenty more.
What's going on right now?
As reported by various media outlets, such as the ABC, monthly inflation for August showed an annual increase of 5.2%, which was an increase from 4.9%. In other words, inflation accelerated again.
In monthly terms, automotive fuel prices rose 9.1% in August. The ABC reported that housing, transportation, food and insurance were the most significant drivers of the overall inflation increase.
In my mind, while fuel prices are seen as volatile, fuel is something that can impact households and national logistics, so it could then drive inflation across the wider economy.
Wesfarmers released its FY23 result before the recent jump in oil prices. It said that "elevated inflation and higher interest rates are expected to continue to impact demand in parts of the Australian economy, with many customers becoming more value conscious and trading down to lower-priced retailers and products."
Wesfarmers believes that in the current environment, the "strong value credentials and core offer of everyday products across the group's retail businesses position them well to meet changing customer demand, acquire new customers and profitably grow market share."
Perhaps surprisingly, in the first seven weeks of FY24, Kmart Group and Bunnings were both able to deliver some sales growth, though the growth rate has moderated. Officeworks sales were flat.
Outlook for profitability
Thoughts about the company's profitability can affect where the Wesfarmers stock price is going.
Revenue is just one side of the equation. The company's expenditure is forecast to keep rising – Wesfarmers says that cost pressures in Australia and New Zealand are expected to remain elevated, driven by inflation, labour market constraints and wage cost increases, as well as domestic supply chain costs.
However, the company's larger businesses are benefiting from their ability to leverage their "scale and sourcing capabilities." Management believe the company can adjust its costs in line with trading conditions.
The chemicals, energy and fertiliser (WesCEF) segment's existing businesses are expecting to see significantly lower earnings in FY24 because of lower ammonia prices and higher input gas costs. However, the first earnings from its lithium business are expected in the FY24 second half as production of spodumene (lithium) ramps up.
The estimate on Commsec currently suggests that Wesfarmers could generate earnings per share (EPS) of $2.21, which would represent a small amount of growth compared to FY23. Any growth could be good growth in this environment. This would put the Wesfarmers stock price on a forward price/earnings (P/E) ratio of 24 times.
Profit could then jump 14% in FY25, leading to EPS reaching $2.52, putting the current valuation at 21 times FY25's estimated earnings.
My 2 cents on Wesfarmers stock
It's certainly possible that sales and profit could be impacted by the current economic environment over the next year or two, but I believe Wesfarmers' portfolio of businesses makes it one of the more well-equipped S&P/ASX 200 Index (ASX: XJO) shares.
Over the long term, I think its ongoing expansion of existing businesses and new businesses (such as healthcare) can lead to good compounding returns for shareholders.
