Is the tide turning for Wesfarmers Ltd (ASX: WES) hardware business Bunnings?
While much has been made of the problems, competitor Woolworths Limited (ASX: WOW) is having with its rollout of hardware brand Masters, very little analysis seems to have been conducted on Bunnings.
But having spent some time looking closely at Bunnings, it appears the giant DIY and hardware supplies retailer may finally be feeling the heat from the added competition from Masters and a resurgent Mitre 10 – owned by Metcash Limited (ASX: MTS).
The good news
A skim of Bunnings recent quarterly sales shows double-digit sales growth over the past 8 quarters (averaging 11.5%) and same-store-sales growth in the high single digits (average of 8.2%). That suggests Bunnings is not only growing sales from new stores, but is still generating strong growth from existing stores.
The company now has 326 stores, including 230 warehouse format stores, up from 310 stores and 211 warehouse stores in December 2012. With annual sales of more than $8.5 billion, Bunnings has an estimated 19% of the $45 billion Australian home improvement market, which may surprise you. The reason is that the industry is still highly fragmented and contains more than a few specialist retailers such as plumbing and bathroom products supplier Reece Australia Limited (ASX: REH), GWA Group Ltd (ASX: GWA) which supplies building fixtures and fittings, Thrifty-Link and smaller companies such as pool and spa products manufacturer and distributor Waterco Limited (ASX: WAT).
With Australians continuing to show their love of renovating, Bunnings may well be able to continue rolling out new stores and generating strong growth from its existing ones, but as you might expect, there are some issues.
Bunnings' bumps
While still generating strong earnings before interest and tax (EBIT) margins of more than 12%, Bunnings' margins have started dipping downwards, as you can see from the chart below.
Source: Company reports
That suggests that Bunnings is beginning to feel the pressure, both from Masters and the resurgent Mitre-10. Or has Bunnings lowered its margins in an effort to put more pressure on Masters (to keep its prices low)?
Mitre 10 is estimated to have around 4% of the market, with its 400 plus stores but around 70% are in country locations – which likely have lower sales and many are franchises. Under the ownership of Metcash, Mitre 10 appears to be thriving, with sales up 16.5% in the last half to $524.2 million. The problem for Metcash is profitability. Mitre 10 is lumped in with the automotive division and between the two generates EBIT margins of just 3.4%. That should improve as Metcash brings its significant distribution and supply chain skills to bear.
The other issue Bunnings faces is that despite statements from management about opening 20 plus stores a year for a number of years, the simple fact is that since June 2012, Bunnings has opened a net 24 warehouse stores – about 8 a year. Clearly Bunnings is having similar issues to Masters in finding good sites to setup shop. Considering the size of the warehouse stores, that's perhaps understandable. Analysts also tend to agree that if Bunnings opens 20 stores a year, there's a serious risk of slashing same-store-sales, margins and returns.
Takeaway
With Bunnings having 19% market share, there's certainly room for the hardware retailer and other players to continue growing. But like the threats to Woolworths' Food and Liquor business, Bunnings may be facing similar threats.
