Wesfarmers and Woolworths go head to head in hardware

Build your own profit in the DIY hardware business.

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As the economy is beginning its upturn, the hardware and DIY repair retail industry will get a boost from consumers having more cash to do the repairs and touch-ups, along with the seasonal effect of the warmer months.

This is a mature market dominated by Wesfarmers (ASX: WES), which owns Bunnings Warehouse, and according to IBISWorld controls 21.5% market share in hardware and building supplies retailing. Bunnings has been a constantly growing success story for many years, and from an investor's point of view, you only have to go to one of its stores on a weekend and see the amount of people in the stores to know it is a winner.

The Wesfarmers 2013 annual report reported that Bunnings had revenue of $7.7 billion, up 7.0%. Similarly, earnings before interest and tax (EBIT) were up 7.5% to $904 million. Creating new stores is essential to maintain growth, and in a fragmented industry as this, there is room to grow.

And grow it will. It has plans to build 20 more stores in this financial year to add to the total 313 currently. This is higher than the long-term average of 10-14 annually, so as the economy is starting to expand again, the increase is warranted to stay competitive.

According to Bunnings managing director John Gillam, finding a new building site and getting it in the development pipeline takes around three years, and the company has picked up more sites during the GFC when property prices were depressed.

Woolworths (ASX: WOW) has also been picking up sites for its Masters hardware chain, which is in second position after Bunnings. With only 31 stores currently — and not turning a profit yet despite rising sales — Woolworths is going through growing pains. Its hardware and DIY segment (made up of Masters and Danks) had sales of $1.24 billion, up 49.6%, but EBIT was a net loss of $138.9 million.

It plans to add 18 more this financial year, and securing good sites for future growth has now become a harder game since both of the retail giants must try to stay one step ahead of each other to control prime real estate near population growth areas.

How does an investor tap into the Bunnings growth success directly by itself?  The answer is BWP Trust (ASX: BWP), the managed investment scheme that invests in the commercial real estate for Bunnings' sites. As the number of stores rise, its property portfolio rises and the returns flow from more leasing revenue.

Its EBIT has risen every year since 2004, from $32 million to $110 million. The share price has recently been rising since its low of $1.60 in August 2011.

Foolish takeaway

Learning about and investing in the DIY/hardware industry is something that the average investor can do because it's the kind of business that you might regularly visit throughout the week. If you go to a store, and it's hard to find parking and the cash register lines are long, your first thought should be, "can I buy stock in this company?"

It's only the first step in your stock research, but you can see for yourself it is successful, so if you like the products, you may just love the company. Use this method to identify up and coming companies that have appeared at shopping malls, and are attracting a lot of foot traffic.

Think about your own total return and find out about companies with good dividends. Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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