Wesfarmers Ltd (ASX:WES) and Coles Group Ltd (ASX:COL) have benefited greatly from changing consumer trends thanks to the ongoing COVID-19 pandemic and are likely to continue their upward trajectory, according to global credit consultant S&P Global.
Wesfarmers, which owns brands including Bunnings, Officeworks and Kmart, has seen its shares rise to new all-time highs of $56.40 this year, although Coles Group, which controls the Coles supermarkets, this week fell to just above $16, about the point it was trading before the market-wide pandemic slide last March.
Both groups were buoyed by positive assessments from S&P Global, which is confident increased online shopping and the need from home-based office and DIY products will continue well into 2021.
“Increased consumer spending on home improvement projects, homewares and work-from-home needs (will continue) as consumers continue to work from home and holiday locally,” it said.
Wesfarmers brands in high demand
What some may not know is that Wesfarmers is one of the most diversified companies listed on the ASX.
It is well-known as the parent company of the aforementioned retail brands, as well as Target, and online bargain retailer Catch.com.au (it also retains a 4.9 per cent shareholding in Coles Group, which it demerged in 2018 and half-owns Flybuys alongside Coles).
But Wesfarmers also has interests in the energy, chemical and fertiliser sectors, while it has in the last 24 hours signed off on a $1.8 billion investment into the Mt Holland Lithium Project in Western Australia, with its joint venture partner Sociedad Quimica y Minera de Chile (NYSE:SQM).
In its half-year earnings, Wesfarmers revealed that its energy, chemical and fertiliser arm had suffered a 7.5 per cent decline, but it was comfortably offset by significant growth across Bunnings, Officeworks and Kmart.
“We believe Wesfarmers' diverse portfolio of retail businesses positions the company well to benefit from consumers continuing to redirect discretionary income toward at-home purchases given the ongoing restrictions on international travel and intermittent periods of COVID-19 stay-at-home orders,” S&P Global said.
“We expect Wesfarmers' retail sales growth to remain above historical rates over the coming 12 months, however, we do not anticipate sales growth rates to match the extraordinary levels seen at the onset of the pandemic in early 2020.
“In addition, significant increases in demand for Officeworks' home office products such as technology and furniture are likely to moderate over the next 12 months as these purchases are in large part driven by one-off home office setup requirements.”
S&P Global also raved about Wesfarmers’ shift towards digital, including click-and-collect initiatives and Catch.com.au, and said the $950 million it expected to spend developing the Mt Holland lithium project could be funded through existing liquidity.
Coles fundamentals look good
While Coles’ shares have taken a slide in 2021 thus far, its half-year earnings made for promising reading.
Earnings before interest and tax increased 12 per cent, driven by prolonged at-home consumption of consumer staples, including groceries and alcohol.
Sales revenue grew about 8 per cent, with its Liquor business gaining 15 per cent, Express service station business gaining 10 per cent and supermarkets growing 7 per cent.
“We expect at-home consumption to continue to benefit Coles' supermarket division, with strong grocery demand persisting in the second half of fiscal 2021,” S&P said.
“This positive momentum is supported by consumers holidaying domestically while international borders remain closed, consumers trading up to more premium products, and promotional activity remaining subdued given sustained levels of above-trend demand.
“Having said that, we anticipate sales growth rates for the remainder of fiscal 2021 to be subdued in comparison to the extraordinary levels seen at the onset of the pandemic in early 2020.”
- Daniel Paproth