Wesfarmers Faces Inflation Risks Amid Rising Profit and Tariff Concerns

CEO Highlights Supply Cost Pressures and Economic Challenges / Reuters

Wesfarmers, Australia's leading non-food retailer and the owner of prominent brands like Bunnings and Kmart, has reported a net profit of A$1.47 billion for the first half of the fiscal year, surpassing analysts' expectations. This figure represents a slight increase from A$1.43 billion during the same period last year and reflects robust demand, particularly at Bunnings, as well as Kmart's appeal to budget-conscious shoppers. The positive performance comes despite broader market uncertainties and challenges stemming from a soft local dollar and geopolitical tensions.

In a recent trading update, CEO Rob Scott addressed potential inflationary pressures that could arise from tariffs imposed by U.S. President Donald Trump. He indicated that the combination of a weaker Australian dollar, which many economists attribute to concerns over these tariffs, is likely to elevate supply costs by mid-2025. While Wesfarmers has not indicated direct vulnerability to these tariffs across its diverse business portfolio—including industrial chemicals and a lithium project—Scott noted the potential for indirect impacts that could further strain the economy.

Wesfarmers aims to manage these cost pressures by exploring various strategies to mitigate price increases. Scott emphasized that while the recent interest rate cut in Australia may offer some relief to households, it will not fully resolve high living costs or the broader economic challenges facing the country. He pointed to ongoing difficulties in the housing sector, which remain well-documented and are unlikely to resolve quickly.

Despite these economic headwinds, Wesfarmers' overall business health remains strong, as evidenced by the 3.1% growth in pre-tax profit at Bunnings, the company’s primary revenue generator. Analysts from Jefferies described the financial update as solid, highlighting that sales have remained resilient and that ongoing productivity measures are effectively countering cost pressures. In light of these developments, Wesfarmers has declared an interim dividend of A$0.95 per share, a slight increase from last year’s A$0.91, demonstrating the company’s commitment to delivering value to its shareholders.

Furthermore, Wesfarmers has reiterated its commitment to its lithium joint venture with Chile’s SQM, which is projected to begin producing battery-grade lithium hydroxide by mid-2025. Scott mentioned that this project is expected to be profitable even amid fluctuations in lithium prices, although any future price increases would be advantageous.

However, the company is not without its challenges, as it has announced the closure of its online marketplace, Catch, following significant operational losses. The wind-down of Catch is expected to incur costs between A$50 million and A$60 million and will result in approximately 190 job losses. This strategic move reflects Wesfarmers' focus on consolidating its core businesses and navigating the current economic landscape.

Overall, Wesfarmers is positioned to adapt to the evolving market conditions, but the potential for inflation driven by tariffs and a weaker dollar presents significant challenges that could influence future pricing strategies and overall profitability.