Wesfarmers Limited

The Business

Bunnings is the core, contributing roughly 47% of group revenue and the vast majority of earnings, with a 69% return on capital and no serious competitor since Masters exited in 2016. Kmart Group (25% of revenue) has quietly turned itself from a discount retailer into a vertically integrated product business through its Anko private label. Health, built around the Priceline and API network, is now 14% of revenue and the fastest-growing division. Officeworks (8%) and the WesCEF chemicals and lithium arm (7%) round out the portfolio.

Recent Performance

FY26 revenue reached $47.3 billion, up 3.4% on FY25's own 3.4% gain, so growth has been steady rather than accelerating. Bunnings and Kmart same-store sales ran at roughly 3.7% and 5.2% respectively, while Officeworks earnings before tax fell around 27% on soft corporate and SME demand. The stock's re-rating to current levels has outpaced this operational picture, with the market now paying a materially higher multiple than it did through most of the last decade.

Outlook

Revenue growth is expected to run at 4.0-4.1% in FY27-28, moderating toward 3.5% by FY29 as the base gets larger. Group EBITDA margin is likely to dip in FY27 as Bunnings absorbs the Industrial & Safety business, before recovering over the following two years as Kmart's margin gains and a lithium refinery ramp offset that drag. Earnings growth is expected to be modest in the near term before stepping up further out, consistent with a business compounding steadily rather than accelerating.

Key Risks

The stock's premium valuation multiple leaves little room for error: any earnings miss risks a disproportionate de-rating given how much of the current price depends on sustained outperformance. A deeper consumer downturn is a genuine risk in our modelling and could compress group profitability meaningfully, though Bunnings and Kmart's value positioning offers more protection than Officeworks and Health, which carry greater exposure to discretionary and SME spending. Repeated delays at the WesCEF lithium refinery, driven by odour and technical remediation issues, are a further earnings risk if the ramp continues to slip, though the joint venture structure with SQM limits Wesfarmers' direct capital exposure.

What to Watch

The thesis-defining event is the RBA's rate trajectory through H1 2027. The path interest rates take will confirm or reject the market's currently generous implied cost of capital, which is one of the biggest drivers of how the stock is priced today.

• Feb 2027 H1 FY27 results — Officeworks recovery and lithium production update will be key markers of whether the operational picture is improving.
• Mid-2027 Lithium refinery qualification — a successful ramp would remove a persistent execution overhang on WesCEF.

Latest Developments

FY26 results confirmed the pattern driving this thesis: Bunnings and Kmart gaining share while Officeworks earnings fell around 27%, a bifurcation consistent with a cost-of-living-squeezed consumer trading down rather than pulling back altogether.

Company Description

Wesfarmers is a diversified retail conglomerate built around five operating divisions. Bunnings (roughly 47% of group revenue) is the home improvement and building supplies leader, now incorporating the Industrial & Safety business. Kmart Group (25%) spans the value-format Kmart and Target chains, built on a private-label sourcing model rather than third-party brands. Health (14%) combines the Priceline pharmacy network with the API wholesale and distribution business. Officeworks (8%) serves business and education stationery and technology, and WesCEF (7%) covers industrial chemicals, fertilisers and the group's lithium interests through the Mt Holland joint venture.

Where the Growth Is

Kmart's transformation is the standout driver. Earnings before tax margin has expanded from 5.5% to 9.4% over four years, powered by the Anko private-label platform and global sourcing scale, generating a 68% return on capital employed. This is not a cyclical bounce; it reflects a structural shift in how the business sources and develops product. We expect the division to sustain a 9.0-9.4% margin through the forecast period, with further upside available if the online marketplace scales as management intends.

Competitive Position

Bunnings' advantage is scale and breadth: 506 stores, the largest range in the category, and no national competitor since Masters closed its doors in 2016. Roughly 40% of Bunnings' demand is repairs and maintenance spending, which holds up better than discretionary categories through a downturn. Kmart's advantage is different in kind, a vertically integrated supply chain that lets it undercut department-store rivals on price while improving its own margin. Both positions look durable over the next 7-10 years, though digital-native entrants in commoditised categories and continued price competition from Temu and Shein in value apparel are the areas most likely to test that durability over time.

Management & Capital Discipline

Rob Scott's team has delivered a five-year total shareholder return of roughly 15% a year against the ASX100's 8.2%, built on a willingness to both build and exit: the Coles demerger, the API pharmacy acquisition, and the wind-down of the Catch online marketplace. Guidance has generally been reliable and specific. The one recurring weak spot is the WesCEF lithium refinery, where production guidance has been revised more than once due to technical and odour-related delays, a blemish on an otherwise strong record of doing what they say they will do.

Financial Position

The balance sheet carries net debt at roughly 1.9 times EBITDA, comfortably inside covenant and rating agency thresholds, supported by an A-range credit rating and $1.7 billion of undrawn facilities. Free cash flow conversion has run at 91% of earnings, funding an 87% payout ratio without straining the balance sheet. This is a business that can keep investing through a downturn while more leveraged competitors retrench.