The Wesfarmers Ltd (ASX: WES) share price has been an impressive performer this year, rising by 30%. However, there are signs that could suggest some positives are building for the company's profit for 2025.
For anyone that hasn't heard of Wesfarmers, it's the owner of Bunnings, Kmart, Officeworks, Target, Catch, Priceline and so on.
In my view, Wesfarmers already looks like one of Australia's best retailers, but its shares could look more appealing in 2025 and beyond for a few different reasons, which I'll discuss below.
RBA interest rates getting closer
Earlier this week, the Reserve Bank of Australia (RBA) gave its latest thoughts on inflation and potential interest rate movements.
The high interest rate has been one of the biggest headwinds for consumer spending, construction, and renovation activity. This decline in economic activity is exactly why the RBA wanted to try to reduce overall inflation in the country.
But a rate cut may not be that far away now. In its December update, the RBA said "while underlying inflation is still high, other recent data on economic activity have been mixed, but on balance softer than expected in November…Some of the upside risks to inflation appear to have eased and while the level of aggregate demand still appears to be above the economy's supply capacity, that gap continues to close."
While the RBA noted that underlying inflation remains too high, it also said, "The board is gaining some confidence that inflation is moving sustainably towards target".
An interest rate cut, or cuts, could be positive for Wesfarmers shares if investors are willing to pay more for the company. It could also be good for the profit.
Its businesses are well-positioned for the economic environment
I believe that Wesfarmers will be able to do well next year, whatever happens. I'm expecting growth over the long term, but 2025 specifically could be positive.
An interest rate cut and expectations of more could spur an increase in overall demand for products, particularly at Bunnings and Officeworks. As the clear leader in the hardware sector, Bunnings could significantly benefit from a boost in construction and renovation activity.
Revenue and profit growth from Bunnings is essential for Wesfarmers shares because it makes up such a large proportion of its financials. In FY24, Bunnings made approximately 60% of total operating profit (EBIT), so profit growth in this segment would be very helpful.
Of course, interest rate cuts are not guaranteed. Australian inflation could remain higher than expected, or global inflation could resurface if a tariff trade war or something else kicks it off.
If Australian interest rates remain high, Kmart and Bunnings could benefit because of their focus on providing value to customers – a tough environment may help them accelerate market share growth if households remain value-conscious.
Ongoing expansion
Wesfarmers has invested heavily in productivity and efficiencies over the last few years, which is helping the business achieve higher profit margins.
However, I'm most impressed by the company's ability to grow its addressable market and reach customers. I think that's key to helping push Wesfarmers' share price higher in the coming year.
Opening new stores is an obvious strategy, which the company is still doing.
But Bunnings has been looking to service more customers by expanding its product ranges to areas like pet care and auto products. Excitingly, Kmart is looking to distribute its Anko products into new markets globally to increase the addressable market. These sorts of initiatives could help Wesfarmers grow revenue and profit in 2025.
Across the retail business, Wesfarmers is looking to grow its online sales and improve its capabilities.
Wesfarmers could continue to invest in its other operations in 2025, which could help grow earnings next year and beyond. Its lithium operations are expected to start production in mid-2025, with sales expected in FY26 (which includes the second half of 2025). Ongoing investment in its healthcare and other industrial businesses could also help profit.
According to the projection on Commsec, the Wesfarmers share price is valued at 32x FY25's estimated earnings and 27x FY26's estimated earnings. While it's not cheap, the company is forecast to grow profit, which I think is the main positive factor for a high-quality ASX share like this.
