A logo of Bunnings is seen at a store in Sydney
A logo of Bunnings, which is part of the Wesfarmers retail conglomerate, is seen at a store in Sydney, Australia February 17, 2022.

Australian conglomerate Wesfarmers Ltd, owner of the country's no. 1 hardware chain, reported annual profit fell and warned of "challenging" inflation, but said raw materials prices were down while demand was high for home improvement projects.

The outlook issues on Friday shows a company transitioning from one extraordinary challenge to another: during COVID-19 lockdowns its products were in high demand but trading was disrupted, while it now faces soaring materials costs and consumer confidence dented by rising living cost pressures.

Wesfarmers net profit for the year ended June fell 2.9% to A$2.35 billion ($1.64 billion), bettering analyst forecasts of about A$2.2 billion, due to pandemic store closures and restrictions in the first half. Its main earner, the Bunnings hardware chain, raised its profit contribution by 0.9%.

But Australia ended lockdowns in late 2021 and overall profit in the January-to-June half leapt 13% as shoppers rushed back to the company's stores, which also include local versions for Kmart and Target outlets.

Bunnings, an institution in Australian retail, increased sales in the first seven weeks of the financial year that started in July, the company said, without giving more detailed profit guidance.

"The nature of the products in Bunnings, it's not all discretionary. There's a lot of repair and maintenance spend," said Chief Executive Rob Scott, speaking on a call with journalists.

Wesfarmers had previously reported it was exposed to skyrocketing prices of timber, amid surging global demand, but Scott said the cost of timber and other raw materials like cotton and plastic resin had moderated.

"These decreases in some of the raw materials prices will ultimately start to flow through to consumers over the next six to nine months ... but I suspect over the next few months inflation will be a challenge," he said.

Cost of living pressure also appeared to be benefiting budget department store chain Kmart, which makes about a third of the profit Bunnings generates, as shoppers looked for ways to cut costs.

Shares of Wesfarmers were up 1.7% in morning trading as analysts upgraded forecasts in line with the company's upbeat outlook. The Sydney benchmark was 1% higher.

Wesfarmers "will continue to leverage its scale and sourcing capabilities to manage inflation", UBS analysts wrote in a research note.

Ord Minnett analysts wrote that it expected investors to up their forecasts for Wesfarmers, although "this may be partly offset by lower Bunnings margins and higher interest costs".

($1 = 1.4368 Australian dollars)