Wesfarmers' Officeworks profit warning tests a 30-times earnings valuation

A material profit warning at Officeworks and persistent softness at Kmart have put fresh scrutiny on Wesfarmers' premium valuation, even as fund managers near-universally agree Bunnings remains one of Australia's best retail businesses.

30 Jun 2026 · 6 min read

Wesfarmers Ltd (ASX: WES) has spent the past year testing how much premium valuation a genuinely excellent core retail portfolio can support once one of its smaller divisions runs into real trouble. Tyndall Asset Management flagged the starting point for the debate in August 2025, noting Wesfarmers continued to trade at an historically high price-to-earnings ratio of 36 times, with an unexceptional FY25 result showing only 3.7% EPS growth, even as the stock outperformed purely on the announcement of capital management.

A material profit warning at Officeworks

The clearest crack in the story emerged at the company's November 2025 AGM update. Pendal Group reported a mixed trading update, with Bunnings commentary in line with consensus showing year-to-date sales growth ahead of the second half of FY25, but Kmart Group disappointing with year-to-date sales broadly in line with the second half of FY25, below consensus expectations of +5.9% growth. Most significantly, Officeworks flagged a material profit warning representing a roughly 25% downgrade, driven by softer demand and competitive pressure. Atlas Funds Management added context on management's response in February 2026, noting Wesfarmers announced a transformation program repositioning how Officeworks approaches the market, moving to a lower-cost operating model to support lower pricing and more effective competition during promotional periods.

Wesfarmers' other key retail divisions, Bunnings and Kmart, have been the lowest-cost operators in their respective fields of hardware and discount department store retail for some time, which has enabled them to continue taking market share and increasing profits. The message for investors is to invest in the lowest-cost operator.

Atlas Funds Management, Monthly Report, February 2026

An underweight built on non-retail dilution

Yarra Capital Management has maintained a consistent underweight position through the volatility, repeating across both October and December 2025 commentary that while it believes Wesfarmers' core retail businesses, Bunnings and Kmart, will trade reasonably well in the environment ahead, the group's non-retail exposures, specifically citing lithium, will continue to dilute the quality of the broader group. Infinity Asset Management took a more moderate tactical approach, reducing its position slightly in October 2025 as the probability of fewer RBA rate cuts materialised, prompting it to moderate some of its overweight toward discretionary retailers generally, while retaining Wesfarmers as a high-conviction holding overall.

A valuation debate splits even the bulls

By March 2026, the valuation question had become the central point of contention even among managers who admire the underlying businesses. Plato Investment Management rated the stock somewhere between a sell and a hold, acknowledging Bunnings and Kmart are two of Australia's great retail businesses, category killers that have continued growing earnings by expanding into adjacent categories, but flagging genuine question marks over whether the health assets will achieve an appropriate return over time, and concluding the valuation above 30 times earnings and modest dividend yield make it fundamentally hard to stack up. Perpetual Asset Management agreed, describing Wesfarmers as looking pretty expensive for what it offers despite loving the Bunnings franchise, comparing the stock to a term deposit alternative given the elevated multiple makes it tough to buy on growth grounds alone.

It is just that valuation though, over 30 times, and the dividend yield, which just makes it fundamentally hard to stack up.

Plato Investment Management, Article, March 2026

What managers are watching next

With Perennial Partners moving underweight in February 2026 amid broader technology sector concerns unrelated to Wesfarmers' own retail operations, and Officeworks now mid-transformation to a lower-cost operating model, the catalysts fund managers are tracking are whether the Officeworks turnaround delivers the promised competitive repositioning, how Kmart's sales trends evolve relative to consensus expectations, and whether Bunnings' continued market share gains are enough to justify a group valuation that several long-time observers now consider genuinely stretched.