Wesfarmers (WES) - AI-ming high

Wesfarmers is a retail and industrial conglomerate that owns the Bunnings hardware chain, Kmart discount department stores and Officeworks supplies chain, and the Wesfarmers chemicals, energy and fertiliser (WESCEF) business. Wesfarmers Limited was founded in 1914 and is headquartered in Perth, Australia.‍

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Wesfarmers (WES) delivered a well-received presentation at its strategy day where the retail and industrial conglomerate laid out how plans to exploit AI and leverage its data to accelerate its long-term sales and earnings growth at its key Bunnings, Kmart, and Officeworks businesses. Ord Minnett makes the following observations:‍

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Bunnings – The hardware chain said it had not suffered significant supply-chain disruptions from the Middle East war and its business was proving resilient through the cycle. Drivers for the business include the following: 1) online sales led by agentic AI, which is generating significantly higher average order value (AOV) than non-AI sales; 2) an acceleration in retail selling area growth following a period of more subdued growth; and 3) expanding the product line to select white-good segments, with the current store space devoted to its kitchen renovation sales being reduced to accommodate the broader appliance offering;‍

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Kmart – The division trading under the Kmart and Target brands is aiming to double earnings over the next 5–10 years. Key points are as follows: 1) expansion of its K-Home store concept – a stand-alone format aiming to be a lower price-point rival to IKEA; 2) implement its Plan C+ store format, which moves checkout registers and service desks back to the front of the store near the exit after the much-loathed 2015 changes that placed them in the centre of the store; 3) growth in its ubiquitous Anko brand globally and locally – Anko Global already has five store in the Philippines and Anko comprises 1/5 of Target sales; 4) investment in warehouse systems and its next-generation fulfilment centres; and 5) freight and input costs are under pressure but are being offset somewhat by strength in the Australian dollar (which reduces the cost of imports);‍

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Officeworks – This business will undergo a restructuring over the next few years that is built on three pillars: 1) a wider range of technology, with the segment now accounting for almost 2/3 of sales; 2) growing its private label sales using Anko’s sourcing capabilities; and 3) upgraded enterprise resource planning (ERP) software and expansion of AI-driven systems, along with store rationalisation, to reduce costs; and‍

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Chemicals, energy and fertilisers (CEF) – Divisional earnings are expected to benefit from the Middle East-driven surge in ammonia prices from the September quarter, while in the lithium arm, the refinery ramp up will take centre stage after spodumene production hit nameplate capacity in FY26. A final investment decision (FID) on the increased capacity at the Mt Holland plant is due in the first half of FY27.

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Post the strategy day, we have made minor changes to our EPS estimates to incorporate Officeworks transformation costs, a lower contracted price and reduced spodumene concentrate price for the Covalent lithium arm, and currency impacts. Overall, this drives reductions in our EPS forecasts of 0.2%, 1.2% and 0.8% over FY26, FY27 and FY28, respectively. We raise our sum-of-the-parts (SOTP)-derived target price on Wesfarmers to $75.00 from $70.00 to factor in higher earnings multiples but reiterate our Hold recommendation on valuation grounds.

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