The Wesfarmers Ltd (ASX: WES) share price rose 1% yesterday after the company reported its FY25 half-year result. That's despite the ASX retail share already seeing a 23% increase in the last 12 months.
Result days are very interesting to me because that's when we get an insight into how the company has actually performed, whereas the rest of the year is just guesses by the market about what's going on and reactions to other events happening locally and globally.
Although Wesfarmers' profit growth was not exactly booming, given the current economic environment, it's notable that the company achieved any growth at all.
First, let's recall some of the main financial figures the company told investors about in its first six months of FY25.
Earnings recap
Wesfarmers reported that revenue increased by 3.6% to $23.5 billion, operating profit (EBIT) climbed 4.7% to $2.3 billion, net profit after tax (NPAT) grew 2.9% to $1.47 billion, and the dividend per share was hiked by 4.4% to 95 cents.
In terms of divisional profit:
- Bunnings Group earnings rose 3.1% to $1.3 billion
- Kmart Group earnings grew 7.2% to $644 million
- WesCEF (chemicals, energy and fertiliser) earnings went up 2.9% to $177 million
- Officeworks earnings increased 1.2% to $87 million
- The industrial and safety division experienced an earnings drop of 8.2% to $45 million
- The healthcare division of Wesfarmers experienced a 3.7% earnings rise to $28 million
- Catch earnings improved 4.9% to a loss of $39 million
The Wesfarmers managing director, Rob Scott, explained that the cost of living and the cost of doing business pressures continued to significantly impact many households and businesses. In this environment, its businesses aimed to provide even greater value, service, and convenience for customers. "Proactive efficiency and digitisation initiatives helped mitigate higher costs, while enabling divisions to enhance the customer experience", according to Scott.
Some investors may say that a 2.9% profit rise shouldn't justify the huge rise in the Wesfarmers share price over the past year (23%). The two-year rise of around 50% has been even more impressive.
And it'd be easy to say it's not a buy because of the much higher price-earnings (P/E) ratio. If I simply doubled the half-year's earnings, the Wesfarmers share price would be trading at 30x that annualised figure. That does seem high for its current profit growth rate.
However, the business has demonstrated its quality recently by delivering growth in a weak environment, and interest rates have also started to fall. So, let's look at some reasons why it could still be a buy.
Reasons to be optimistic in the medium-term about Wesfarmers shares
For starters, Wesfarmers reported that Kmart Group's sales grew faster in the first few weeks of the second half of FY25 compared to the growth rate of the first half of FY25. Faster growth would justify a higher P/E ratio if it can sustain that faster increase in sales
Kmart Group and Bunnings also delivered a higher return on capital (ROC), showing that they are becoming increasingly profitable for how much money is invested in those businesses. This is important because they make the lion's share of the company's overall profit.
Bunnings Group's ROC improved by 5.7 percentage points to 71.5%, while Kmart Group's ROC grew by 7.1 percentage points to 65.9%. In my view, I think Wesfarmers should keep investing in these businesses if there are places where it'd be beneficial to allocate money.
Finally, with interest rates reduced in Australia, it makes sense for Wesfarmers shares to be trading on a higher P/E ratio than before, and earnings could increase thanks to households collectively paying less in interest costs.
I think Wesfarmers shares can keep climbing over the long term, but the company is now trading at a historically-high P/E ratio, so I'm not expecting big gains over the rest of 2025.
