Wesfarmers (ASX:WES) shares have fallen 15.31% over the past month, with the stock last trading at $76.79, down 1.85% on the day. Such a sizeable pullback in one of the ASX's largest and most closely watched conglomerates naturally draws attention, particularly given the company's FY26 results showed Underlying Profit growth even as statutory profit and Operating Cash Flow both declined for the year.

About the Company

Wesfarmers Limited is one of Australia's largest listed companies, operating a diversified portfolio of retail and industrial businesses including Bunnings, the hardware and home improvement retailer, Kmart Group, encompassing the Kmart and Target discount department store brands, Officeworks, the office supplies retailer, and Wesfarmers Health, which includes Priceline Pharmacy and wholesale pharmacy operations. The company also operates WesCEF, its chemicals, energy and fertiliser business, which includes an emerging lithium operation through the Mt Holland mine and concentrator, alongside its Industrial and Safety division.

Key Developments

Wesfarmers reported statutory net profit after tax of $2,874 million for FY26, down 1.8% on FY25's $2,926 million, though NPAT excluding significant items rose 8.3% for the year. Group Revenue increased 3.4% to $47,274 million, while Earnings before interest and tax excluding significant items rose 7.3% to $4,493 million. Bunnings and Kmart Group delivered strong earnings growth, supported by everyday low pricing strategies and operating leverage, while Officeworks' earnings reflected one-off costs associated with a transformation program aimed at driving long-term earnings growth through a lower-cost operating model. Wesfarmers Health delivered higher earnings as its multi-year transformation gained momentum. WesCEF's earnings were affected by the timing of higher ammonia prices linked to the Middle East conflict, though the division benefited from an improved lithium contribution, with spodumene concentrate production of 209 kilotonnes exceeding both guidance and nameplate capacity. Operating cash flows decreased 6.5% to $4,272 million, reflecting deliberate Working Capital Investment in WesCEF and Health, including higher spodumene inventories and additional fertiliser inventory purchased at elevated prices due to Supply disruptions. The company paid a capital management distribution of $1.50 per share during the year and declared a fully franked final Dividend of $1.20 per share, bringing total fully franked Ordinary Dividends for the year to $2.22 per share, up 7.8% on FY25. For FY27, net Capital Expenditure is expected to be between $1,300 million and $1,500 million, including approximately $200 million relating to the expansion of the Mt Holland mine and concentrator.

Bull Case

The bull case for Wesfarmers centres on the underlying strength of its core retail businesses, with Bunnings and Kmart Group both delivering earnings growth supported by disciplined execution and operating leverage, helping offset broader cost pressures. NPAT excluding significant items rose 8.3% for the year, a more representative measure of underlying performance than the modest decline in statutory NPAT, which was affected by the comparison against significant items recorded in FY25. The dividend increase of 7.8%, on top of the earlier capital management distribution of $1.50 per share, demonstrates continued capacity and willingness to return capital to shareholders. The ongoing ramp-up of the Mt Holland lithium project, with spodumene production already exceeding nameplate capacity, provides a longer-term growth avenue beyond the company's traditional retail base.

Bear Case

The bear case notes that operating cash flows declined 6.5% for the year, reflecting deliberate but nonetheless real increases in working capital tied up in inventory across WesCEF and Health, at a time when borrowing costs are expected to rise further in FY27 due to higher net Debt and increased capital expenditure. WesCEF's earnings were affected by higher ammonia prices linked to the Middle East conflict and ongoing odour issues affecting the ramp-up of the associated lithium refinery, illustrating how a period of external disruption and operational teething problems can weigh on a Business unit even as another part of the same division, spodumene production, performs well. Officeworks' transformation program, while expected to support longer-term earnings, is generating near-term one-off costs that are affecting reported results in the interim.

Risks

Key risks for Wesfarmers include continued Volatility in ammonia and other input prices linked to geopolitical factors such as the Middle East conflict, which directly affected WesCEF's earnings during FY26. The company's exposure to Australian retail conditions through Bunnings, Kmart Group and Officeworks means broader consumer spending trends and cost-of-living pressures on households remain relevant to future earnings. Execution risk on the ongoing Officeworks transformation program, and on the continued ramp-up of the Mt Holland lithium project and its associated refinery, including resolution of previously identified odour issues, represent company-specific risks to monitor. Rising net debt and higher expected borrowing costs for FY27 also Warrant attention given the elevated capital expenditure program planned for the year ahead.

Conclusion

Wesfarmers' FY26 results reflect continued earnings growth on an underlying basis, led by Bunnings and Kmart Group, even as statutory profit and operating cash flows both declined year-on-year. The result illustrates the balance the company is managing between retail momentum, cost-of-living pressures affecting households, and one-off headwinds in WesCEF and Officeworks tied to external supply disruptions and transformation initiatives. For investors considering the 15.31% monthly decline, the underlying profit growth of 8.3% suggests the core business remains in reasonably good health, though rising capital expenditure and borrowing costs into FY27, alongside the ongoing Mt Holland ramp-up, are factors that will likely shape how the market views the stock over the coming year.