Wesfarmers’ AGM update revealed a slowdown in sales in Bunnings and more cautious commentary on the retail backdrop. In the scheme of things, the slowdown should be mild and therefore the debate is more about the appropriate PE ratio than it is about earnings risks. For Bunnings, we expect sales growth to slow more so in 2H27e and 1H28e as the lagged effects of lower housing churn and lower house prices show through. Kmart has soft sales growth but currency gains to offset the pressure on earnings from cost growth and DC transition.

Wesfarmers reported modest EBIT growth of 3% in FY24 with low growth for Bunnings, a decline in WesCEF and strong rise in Kmart EBIT the notable factors. Bunnings earnings growth is likely to remain low over the next two years given limited store openings and a challenging demand backdrop. We think Kmart’s margins are near a peak, particularly given price competition with rivals is heating up. WesCEF and lithium become the key driver of Wesfarmers earnings from here and it will take up to three years to see meaningful earnings.