AI Helps Accelerate Wesfarmers’ Ambitions

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This story features WESFARMERS LIMITED, and other companies.
For more info SHARE ANALYSIS: WES
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

Wesfarmers' Strategy Day highlighted growth in retail categories and digitalisation through AI adoption.

• Wesfarmers’ retail stable to add more categories
• Impact to be felt by competing retailers
• Productivity to be improved with AI tools
• Continues to enjoy premium valuation

By Greg Peel

Morgan Stanley’s annual Australian Household survey, released this week, found Australian consumers remain cautious, value-led and selective.

Financial pressure has eased from peak levels, but affordability continues to drive behaviour, particularly for lower-income households.

Essentials remain the clear priority, with grocery the only major category showing positive net spend intentions, while most discretionary categories have turned more negative versus twelve months ago.

The main shift, Morgan Stanley found, is consumers are no longer simply cutting back, rather they are actively switching, trading down and changing where they shop.

No great surprise.

The survey supports greater resilience for food, namely Woolworths Group ((WOW)) and Coles Group ((COL)) (although Aldi is benefiting from switching behaviour), and value-exposed retailers, such as Wesfarmers ((WES)), with its stable of value retailers Bunnings, Kmart/Target, Officeworks and Priceline.

Discretionary retailers, including JB Hi-Fi ((JBH)), Harvey Norman ((HVN)), Super Retail ((SUL)), Accent Group ((AX1)) and Myer Holdings ((MYR)), remain exposed to deferral risk and promotional pressure.

Alcohol sales remain structurally soft, impacting Endeavour Group ((EDV)) and Treasury Wine Estate ((TWE)), while health-led consumption remains a consumer priority, supporting the diverse likes of Bega Cheese ((BGA)) and Sigma Healthcare ((SIG)).

It is with this backdrop in mind that Wesfarmers held its annual Strategy Day. As usual, there was no trading update accompanying management’s plans going forward.

Retail Expansion

Bunnings continues to take share from Woolworths and Coles in the pets and household cleaning categories, Citi notes. The expansion into Auto (parts and accessories) puts some pressure on Super Cheap Auto (Super Retail), mostly in car care.

The pending entry into branded whitegoods over the next twelve months has the potential to impact JB Hi-Fi and Harvey Norman, though Citi notes the offer is likely to be at the value end of the market and this category often involves on-floor discounting, which doesn’t play into the Bunnings model.

Kmart’s K Home concept may impact Harvey Norman if rolled out though Citi sees it as mostly a challenge to Ikea. Officeworks’ expansion into the smart home, wearables and gaming categories further encroaches on JB Hi-Fi’s turf.

While the implementation of an incentive model for staff will help, Citi still expects this move to have a limited impact on JB Hi-Fi given that competitor’s strong shopping centre footprint is more conducive to these categories (as opposed to Officeworks’ destination locations).

Ord Minnett points out the division trading under the Kmart and Target brands is aiming to double earnings over the next five to ten years. Aside from K Home, Kmart/Target will increase growth in its ubiquitous Anko brand globally and locally –- Anko Global already has five stores in the Philippines and Fiji is on the cards.

Kmart/Target will also see investment in warehouse systems and its next generation fulfilment centres. Freight and input costs are under pressure but are being offset somewhat by strength in the Australian dollar.

Regarding the store network, Wesfarmers plans 100-plus new property projects for Bunnings to FY30. Kmart’s Plan C format will expand from 16 to 40 stores by end-FY27, Officeworks will add three new stores in FY27, and Anko Philippines will open five new stores by FY27.

Ord Minnett explains Kmart’s Plan C Involves moving 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.

Digitalisation

There was a clear focus at the Strategy Day across the retail segments on building the digital ecosystem, Macquarie notes, including:

i) Implementing AI tools to support revenue and cost initiatives;

ii) improving omni-channel capabilities;

iii) integrating its ecosystem across brands (including loyalty); and

iv) unlocking value from retail media.

Through this, the business aims to achieve customer wallet share gains via cross-shopping and incremental basket growth, with collection and implementation of data key to driving returns and reinvestment.

Retail media was highlighted as an opportunity across several segments (especially Bunnings), where it can use its network/loyalty programs to leverage its high weekly foot traffic across broad customer cohorts.

Morgan Stanley notes AI adoption was a common thematic highlighted across the group, with applications spanning customer engagement, merchandising, pricing, inventory management, supply chain, and productivity.

AI is being used to accelerate existing strategies.

Wesfarmers’ productivity agenda leverages investments in data, automation, and digital infrastructure to drive productivity gains.

Key initiatives, including enhanced demand forecasting and AI-enabled workflow tools, help offset inflationary pressures.

There’s More

For WesCEF (chemicals, energy & fertiliser), ammonium nitrate and sodium cyanide capacity expansions are to be realised from FY27.

Management expects higher ammonia prices to be a headwind in the June quarter FY26, before turning into a net earnings tailwind from the September quarter FY27 given contract pricing lag.

For Lithium, Mt Holland is operating at nameplate concentrate capacity, and refinery ramp-up continues. Management expects a final investment decision (FID) on the Mt Holland mine and concentrator expansion, which would double spodumene production capacity in the first half of FY27.

In Health, strong revenue growth in Priceline chemists is helping to improve franchise economics. Management expects Health to become a more meaningful earnings contributor over time, complemented by expansion in loyalty, health services, and online.

Valuation Premium

The quality and relative defence of Wesfarmers was evidenced again at the Strategy Day, Macquarie comments, led by Bunnings and Kmart. Since Macquarie upgraded the stock to Buy in January, owning Wesfarmers shares has returned a negative -2% versus the discretionary sector at -11%.

With lack of valuation support and no near-term catalysts driving additional earnings upside, Macquarie downgrades back to Neutral, ticking up its target to $85.00 from $84.00.

UBS has taken its target to $84.00 from $81.00 but retains Neutral, believing resilient earnings and the strong return on capital growth outlook for Bunnings and Kmart are reflected in Wesfarmers’ elevated multiple, leaving a balanced risk reward.

Ord Minnett raises its sum-of-the-parts based target price on Wesfarmers to $75.00 from $70.00 to factor in higher earnings multiples, but reiterates a Hold recommendation on valuation grounds.

Morgan Stanley retains Equal-weight and a $78.70 target, along with a “cautious” industry view.

Last month, Morgans upgraded its rating to Accumulate from Trim with an $81.10 target but is yet to update post the Strategy Day.

Least impressed is Citi.

Wesfarmers continues to expand into almost every retail category, thereby increasing the addressable market. This not only buffers earnings, Citi suggests, but also puts some pressure on retailers across Citi’s coverage.

Still, Citi sees a greater share of future earnings growth relying on lower quality, lower multiple businesses than in the last 5-10 years. The broker sees this putting some downside pressure on the overall group PE multiple, particularly in combination with question marks over the housing outlook.

Citi reiterates its Sell rating and standout $69.00 target price.

The consensus target among the six brokers monitored daily by FNArena covering Wesfarmers is $78.80, -6.5% below yesterday’s closing share price of $84.31.

Management’s update on internal plans and ambitions has been well-received in an otherwise directionless market, with the shares trading below $80 prior to the Strategy Day.

Also; Citi’s low marker price target weighs down the average for the other peers where targets range between $75 and $85.

Outside of daily monitoring, Jarden suggests Wesfarmers’ Strategy Day provided a consistent, clear message with no trading updates and a strategic agenda that was more iterative than a step-change.

The overall tone was one of optimism and readiness to be a leader across digital, AI and data, as opposed to the conglomerate’s historical position as a fast-follower (such as online).

Jarden came away more positive, but while seeing the company as well positioned to take share via its “everyday low pricing” and scale, retains a Neutral rating on valuation grounds.

Jarden has a $75.30 target.

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