Wesfarmers reported EBIT growth of 8% in 1H26. There was solid growth in its retail business and an outsized earnings improvement in lithium and associate income. The shape of the result raises debate about the likely operating leverage in Bunnings and Kmart, which we expect to be modest, especially as depreciation expenses normalise. We are also likely to see slowing sales trends on a 12-month horizon given weaker household income growth and fading price inflation. Wesfarmers will have solid EPS growth of 7% over FY26e and FY27e helped by higher lithium prices.

Wesfarmers reported EBIT growth of 8% in 1H26. There was solid growth in its retail business and an outsized earnings improvement in lithium and associate income. The shape of the result raises debate about the likely operating leverage in Bunnings and Kmart, which we expect to be modest, especially as depreciation expenses normalise. We are also likely to see slowing sales trends on a 12-month horizon given weaker household income growth and fading price inflation.

Sentiment around Wesfarmers has dropped away in the past month. This is the retail bellwether stock on the ASX and for the first time the share price fall has outstripped the consensus earnings downward revisions. Are perceptions shifting on Wesfarmers? Perhaps. But we still expect retail sales growth of 4% and EBIT growth of 5%. 

Wesfarmers reported FY25 EBIT of $4,186 million, growth of 5%. The result was helped by higher equity profits and lower depreciation, so EBITDA growth of 3% is a better proxy of the performance in the year. Bunnings, Kmart and Officeworks outlook for earnings growth is modest with limited margin expansion likely as depreciation rises and cost savings are largely offset by cost inflation. We expect WesCEF EBIT to fall 15% in FY26e given larger losses for lithium and lower ammonia prices.

Wesfarmers’ strategy sets an expectation for high-single digit earnings growth. However, the reality will still be some way off given growing losses in lithium. There is little room for any competitive risk to Bunnings or Kmart and a lot priced in for growth from these businesses that account for over 85% of enterprise value. Wesfarmers’ strategy continues to shift towards a focus on organic growth. There are opportunities in new product categories for Bunnings and Officeworks, retail media, online marketplaces and production expansion for WesCEF. The message around acquisitions was intriguing – plenty of desire, few viable options.

Wesfarmers held its annual strategy day and, as always, delivered a consistent message about its focus on long-term shareholder value creation.  The tone of Wesfarmers annual strategy presentation focused more on growth initiatives and highlighted the progress on productivity and technology investments. While a positive presentation, the detail is unlikely to change consensus earnings expectations and the share price remains very stretched.

Wesfarmers’ strategy day highlighted its growth projects and market share opportunities, despite an increasingly challenging economic environment. The businesses may be relatively resilient, but they are not immune. The combination of slowing sales and rising operating costs keep us cautious.

We initiate coverage on Wesfarmers. While Wesfarmers retail businesses are well positioned, they have seen significant benefits to sales and earnings over past two years, which will partly reverse. As a result, retail earnings could drop over the next two years. A special dividend is possible near-term. Wesfarmers has over $10 billion in acquisition capacity on our estimates, but in recent times has only made smaller adjacent acquisitions within existing businesses. The creation of a Health segment is one logical extension for the company with an Australian healthcare industry EBITDA profit pool of over $28 billion.