Why Bunnings is about to become even more important


Published on

Key statistics: ASX: WES

Closing share price 03.07.18: $49.490 52-week high: $49.860 52-week low: $40.000 Most recent dividend: 103c Annual dividend yield: 4.49% Franking: 100%

Broking analysts might not appreciate Wesfarmers' long-time horizons, but management is running the company for you - not them

Wesfarmers, which also owns Bunnings and Officeworks, has announced plans to spin off its Coles supermarkets and Liquorland stores.

The broking analyst reaction to Wesfarmers' strategy day was telling. Broking analysts aren't interested in whether Wesfarmers will be successful over the next 10 years.

Managing director Rob Scott was at pains to highlight the growth opportunities in Wesfarmers' existing businesses. An acquisition isn't on the radar, and will only be "pursued opportunistically" in any case.

Wesfarmers had become too focused on meeting short-term budgets, he said, as well implying that past acquisitions were highly priced.

Bunnings will be even more important to Wesfarmers after the Coles demerger. While Bunnings intends to open 10 to 14 stores a year, the 9% sales growth rate the division has achieved over the past 15 years is likely to begin tapering off.

The strategy day confirmed that it would be more evolution than revolution for Bunnings. Perhaps the most significant opportunity is engaging with commercial customers more effectively. Taking share from commercial wholesalers could help Bunnings maintain above-market growth.

Coles, which should be demerged later this calendar year, is in something of a holding pattern until new managing director Steven Cain joins in September.

Coles intends to boost its private label penetration. But it will also follow in Woolworths' footsteps by rolling out smaller store formats than the company has traditionally preferred.

Kmart considers itself a product development company as much as a retailer and, to that end, it has started wholesaling to retailers in Indonesia and Thailand.

Target's turnaround is gathering pace, with most major categories returning to growth. The strategy is to sell quality fast fashion at price points up to 50% below international chains such as Zara and H&M.

The last major division, industrials, is also Wesfarmers' most diversified. While it contains a few of the company's weaker and more cyclical businesses, there's potential for many of them to expand into adjacent areas.

Management's words are a guide to a company's future priorities. And with the next 10 years to think about, Scott looks to have it right. HOLD.

Get stories like this in our newsletters.

James Greenhalgh is a senior analyst at Intelligent Investor (under AFSL 282288), owned by InvestSMART Group Limited. James graduated with a Bachelor of Commerce shortly after the 'recession we had to have'. After stints in financial planning and with stockbroking firm County Natwest, he realised that poring over annual reports was his true vocation. James has 24 years of investing experience under his belt, with almost half of them at Intelligent Investor. His main areas of focus are the retail and media sectors. To unlock Intelligent Investor stock research and buy recommendations, take out a 15-day free membership.