Australia | 11:21 AM
Wesfarmers offers resilience and quality management to execute through the macro cycle, with digital and agentic levers supporting FY28 earnings acceleration.
- Wesfarmers’ retail resilience shines through a tougher cycle
- Digital, AI and automation unlock the next leg of growth
- Margin resilience sets Wesfarmers apart from retail rivals
- Valuation de-rating offers investors a fresh entry point
By Danielle Ecuyer
When the going gets tough, the tough stand stall
Morgan Stanley stated in mid-September, “Consumer headwinds are building. Higher rates, weaker housing, rising petrol costs and soft confidence point to a tougher FY27”.
At the time, the analyst proposed stocks had de-risked, but earnings had not.
Hardly an inspiring backdrop or narrative for consumer-facing retail stocks?
Yet, Morgan Stanley was comfortable upgrading Wesfarmers to Equal-weight from Underweight on the premise of relatively “stable margins”.
Investors are constantly challenged by narratives versus what is already discounted in share price valuations, alongside a multiplicity of factors, including, most importantly, the earnings outlook.
Put simply, higher interest rates and bond yields have a twofold impact on stocks. In the case of predominantly consumer-facing companies, demand falters under the weight of higher rates; think of the transmission mechanisms of higher mortgage payments and lower house prices.
Meanwhile, higher bond yields offer an alternative investment to the dividend yield from equity.
Jarden’s latest deep dive concentrates on Wesfarmers' earnings history through the economic cycles of the past 20 years.
Notably, the stock has de-rated around -20% since October 2025 and is now trading at a PER around one standard deviation below its five-year average. Short-term relative strength indicators also suggest the shares have moved into “oversold territory”.
The story of Wesfarmers is more deeply anchored in management’s strategic direction and diversification, as well as its ability to execute on intentions and grow earnings through the cycle.
Dissecting Wesfarmers’ retail businesses
Jarden is also not shy in setting out just how potentially negative the macro backdrop is for retailers in the current rate-tightening cycle.
The broker’s macro composite index is in bear territory and approaching levels last seen during the GFC and the June 2022 rate-hiking cycle. The index now exceeds the prior bearish periods of June 2011 and around June 2019.
According to CommBank data, discretionary spending growth halved through August and household cash flow could go negative for mortgaged families if the RBA delivers a rate hike in November.
Historically, these challenging periods have been an opportune time to buy the sector.
But not all retail-facing companies were created equal. Jarden stresses Wesfarmers’ retail divisions have historically been, and continue to be, less cyclical than the broader retail market.
By way of context, Bunnings represented some 56% of divisional earnings in FY26, followed by Kmart at around 25.5%, Officeworks at 3.8%, and Wesfarmers Health at 1.7%.
WesCEF and Industrial & Safety represented the balance at almost 13%. The retail and health businesses generated $3.805bn, or 87.4%, of FY26 divisional earnings, with Bunnings and Kmart accounting for almost 82% alone.
As identified by Jarden, management can support above-market growth through several factors.
Expanding space via a mix of new stores, around 2% p.a. at Bunnings, and new formats, like K-Home, is one strategy.
Management is also successfully expanding into new categories, including auto, cleaning, electrical and pet across hardware; expanded beauty and Anko products across Kmart; and expanded technology and own brands across Officeworks.
Thirdly, the analyst points to the significance of developing “Marketplace”, offering a much broader range of goods including third-party sellers while providing insights into potential “right-to-play” categories, or customer data on categories where Wesfarmers doesn’t have a major presence.
Lastly, but most importantly, against a challenged consumer wallet is the Everyday Low Prices (EDLP) offer. Lower prices expand the total addressable market as consumers trade down. Jarden believes this has been evident with Kmart, with a much broader demographic engaging.
Impressively, Wesfarmers’ major categories have consistently outperformed the comparable market categories, the broker emphasises.
Are margins part of the secret sauce?
One key point of focus for analysts is the ability for margins to be sustained, particularly in the retail divisions.
Morgan Stanley stressed the resilience of margins in 2H26 for Bunnings, rising around 10bp on the prior year, with Kmart Group’s margin up some 20bp year-on-year.
Significantly, cost controls and productivity gains supported margins against weaker 2H trading momentum.
In other words, management has levers to pull to support profitability.
By way of comparison, Morgan Stanley pointed out both JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)) experienced contracting margins in 2H26 compared with the previous year.
Jarden also isolates factors and potential levers for management to serve up higher-than-expected margins.
Growing its Marketplace and online digital offerings has scope to grow both the addressable market and margins. Jarden estimates Wesfarmers’ digital/alternative profit represents less than 3% of retail profit, compared with around 11% for Woolworths Group ((WOW)) and circa 33% for Walmart.
Improved product sourcing via direct channels and own brands across Bunnings and Officeworks could underwrite a “material margin opportunity” over the next one to three years.
Productivity is another key ingredient. Optimising labour, using AI and automation, better allocating staff and expanding the product range available digitally all offer scope to lower operating costs and improve sales.
Automating labour-intensive tasks such as stocktaking through the likes of TORY, Kmart’s autonomous inventory robot, is one example.
Facial recognition, theft gates and improved stock management also offer scope to improve Kmart’s FY27/FY28 margins by reducing inventory shrinkage from theft, damage and other factors.
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