Wesfarmers/Bunnings results FY2023/24
Growth slows
Growth has slowed for Bunnings, though it still retains the revenue gains through the Covid 19 surge in hardware retail purchases. While the company seems to be waiting out a market slump, there are questions as to whether the market is changing fundamentally.
Wed Oct 30 2024
Wesfarmers/Bunnings released its full year financial results for FY2023/24 on 29 August 2024. The results for Wesfarmers showed that the company has essentially kept pace with market growth overall. Revenue was $44,189 million, an increase of 1.5% over the previous corresponding period (pcp), which was FY2022/23. Earnings before interest and tax (EBIT) rose by 3.3% over the pcp to $3989 million, and net profit after tax (NPAT) lifted by 3.7% to $2557 million.
Outside of Bunnings, Kmart Group (incorporating Target) saw earnings increase by 24.6% over the pcp to $958 million and Officeworks lifted its earnings by 4.0% to $208 million. WesCEF (Wesfarmers Chemicals, Energy & Fertilisers) saw a decline in earnings of 34.2% to $440 million. Catch, which had losses of $163 million in FY2022/23, reduced losses to just $96 million in the reporting period.
Bunnings
Bunnings saw revenue grow by 2.3% over the pcp to reach $18,968 million. With a background growth rate of 0.5% for hardware retail turnover throughout Australia in FY2024, this indicates that Bunnings grew marketshare. EBIT for Bunnings came in at $2374 million, an increase of 1.2% over the pcp.
Total stores sales growth fell to 2.6% as compared to the pcp's 3.7%, but store-on-store (comp) sales growth was 2.1%, as compared to the pcp's 1.8%. Digital sales rose to 5.5% of all sales, where the pcp reported 4.4%. Digital sales in the first half of FY2023/24 were 5.1%, and this rose to 5.9% in the second half.
Presentation
In his introductory remarks to the results presentation, Wesfarmers managing director (MD) Rob Scott had this to say about Bunnings:
This year, Bunnings continued to expand its range with innovation across categories such as Smart Home, supporting an increase in customer demand. Bunnings also continued to invest in supply chain data and technology projects to strengthen the customer experience across channels such as the new Bunnings local delivery service.
The business continued to improve its whole build commercial strategy and in the second half, Bunnings opened a new state-of-the-art frame and truss site to supply customers with pre-made frame and trusses with greater efficiency at a lower cost.
The delivery service was further described in the results documentation:
A new last-mile delivery service, Bunnings Local Delivery, was launched and expanded to more than 50 stores, improving the delivery experience for customers.
According to the Bunnings website:
Bunnings Local Delivery is a service provided by selected Bunnings stores to deliver customer orders within their local communities. The Bunnings Local Delivery service is recognisable by our team members, in their Bunnings uniforms, delivering customer orders to homes, businesses and sites in our Bunnings-branded vehicles.
Further:
Bunnings Local Delivery is not an option for customers to select. Bunnings Local Deliveries are determined at a store level, factoring in product dimensions, loads and other delivery options.
In his remarks, Wesfarmers CFO Anthony Gianotti profiled the performance by Bunnings:
In Bunnings, sales growth of 2.3% was supported by growth in both consumer and commercial segments, driving growth in transactions and units sold. As household budgets remained under pressure, consumer sales growth was supported by Bunnings' strong value credentials with bulk pack quantities, own brand products and entry-level ranges all performing strongly.
Pleasing second half sales growth was supported by sustained demand for repairs and maintenance, online channel growth, and range innovation partly offset by a market-wide softening in building activity. Commercial sales growth reflected continued demand from trades, but demand from builders moderated through the year as new buildings starts will lower, relative to recent years.
The sentiments were echoed by the documentation, with an added note on the outlook for Bunnings:
The market-wide softness in building activity is expected to continue in the 2025 financial year, but population growth and the shortages in Australian housing stock are anticipated to support a recovery in building activity over the medium term.
At the end of the presentation's introduction, Mr Scott returned to the prospects for FY2024/25:
For the first eight weeks of the 2025 financial year ... Bunnings continued to see positive sales growth, but growth has moderated from the second half of 2024 financial year impacted by the continued market-wide softening in building activity.
Presentation questions
The majority of the questions at the results presentation focused on Bunnings. Tom Kierath from Barrenjoey started with a question about store growth at Bunnings. The reply by Bunnings MD Mike Schneider is interesting, as it outlines a shift in the retailer's thoughts on expansion. After outlining the actual store expansion that is in place, Mr Schneider said:
Then alongside that and complementing that is the work that we're doing inside the box to drive space productivity harder. So automotive for example, rolling into our stores at the moment and that's coming as we reduce some space in flooring because we can lean more on Beaumont's, for example. So hopefully that gives you a bit of a perspective that we sort of see space growth continuing to be sort of that 10% over the five-year period, but just some timing on some of the projects.
David Errington of Bank of America followed up on this line of questioning:
This is the only question I've really got front of my mind when I'm looking at valuing Wesfarmers as an investment, and that is whether Bunnings has got a lot of growth runway, or whether it's going ex-growth?
What worried me in listening to your answer to Tom's question, and it did worry me when I see the CapEx dropping off as significantly as it does for Bunnings (and it's ironic that I'm saying that about CapEx), but when I look at, like, a Woolworths that spends $2.5 billion on CapEx and Coles are spending over a billion, your CapEx on Bunnings is only $260 million. It's dropped. And when I'm looking at your working capital, you've really driven working capital extremely hard in Bunnings this year, a saving of $230 million despite an inflationary world, [where] I'm imagining inventory ... costs would go up.
So I don't want to poke the bear, but I am in a way, but I am poking you in a way that you're running Bunnings as if it's an ex-growth business. Now I know that there's delays in buildings and whatnot, but I was wondering if Mike [Schneider] can really basically talk about some of the growth initiatives that you've got. Because at the moment when I look at Bunnings' numbers, I understand it's a tough environment, but for me in valuing Wesfarmers, the most important thing for me today is to ensure that still a premium growth business and you are not running it as a mature business that's gone ex-growth.
In his response, Mr Schneider began by pointing out that the design of Bunnings' stores was highly modular, which meant new lines could be added with less effort.
What we don't find ourselves with is the need to go back and sort of hack into 50, 60 stores... We've built a lot of functionality and modularity into our racking in our layout so that when we roll in new categories and new ranges, it's very CapEx light, but it's very revenue positive.
He also pointed to new initiatives in the tool section of Bunnings.
We've got a new tool shop concept that we're rolling into 50 stores before Christmas that when you see them, our tool shop looks materially different. It's delivering some really interesting and very positive results both across our consumer brands and our commercial brands. But we don't have to go and build a new tool shop to do that, David, we just have to modify and adjust racking so we can do that in a CapEx light way.
He also defended Bunnings' further expansion into building, trade and commercial:
We've thought very deeply about how we drive growth in trades, how we drive growth in organisations and we're actually - not withstanding some of the headwinds from a domestic construction point of view - we're actually seeing some incredibly positive results in those areas.
Mr Scott added the comment that one thing which had retarded growth was the high price of construction. He also pointed to Bunnings' investment in frame and truss plants, which would likely only show returns in the medium term.
Pressed further by Mr Errington, Mr Schneider listed more of the growth plans that Bunnings has. In fact, in response to a range of questions, Mr Schneider mainly enumerated what he sees as the growth opportunities for Bunnings. So it is perhaps best to simply list a number of these here.
Analysis
The question about Bunnings is this: how do you manage a retailer in a market which sees extraordinary growth over a period of around three years, followed by a decline in growth that is set to last somewhere from 18 to 36 months?
The two main approaches are to: 1) take full advantage of the upward "blip", then ride out the downwards "blip", preserving the same basic structure to the business, while making as many non-structural accommodations as you can; or 2) see this pattern as being something more than a market boom-and-bust, and set about reforming the business to cope with a changed market.
Bunnings has very much elected to take the first option. Reading the above discussions with the investment analysts it is evident that the overall strategy for Bunnings, in HNN's opinion, is based on treating the current down trend in the building - and therefore hardware - market as a "blip", not a structural shift. In that view, once interest rates are reduced (which HNN expects for the second RBA meeting in 2025, not the first) the housing construction market will recover, at least back to FY2018 levels of activity, and Bunnings will pop back into revenue growth.
The main step the company is taking to deal with the "blip" is to cut back - temporarily - on investment in Bunnings. To blunt the force of the market setback, Bunnings is also expanding its product lines into areas such as pet products and automotive maintenance.
That approach will seem somewhat justified if the downtrend ends up lasting the equivalent of three halves - FY2023/24 and the first half of FY2024/25. But if it extends beyond that, through all of FY2024/25, and even into FY2025/26, it will be seen as a more questionable move.
Not all of the category expansion is based on growing revenue by relying on "convenience" sales driven by foot traffic, such as Christmas gifts for dogs.
There are also expansions that one guesses might have originated with Bunnings' Marketplace, such as kitchen appliances.
Notably, as hinted at in Mr Schneider's remarks at the results announcement, engagement with TTI's Ryobi brand seems to be ramping up. At the same time, HNN is detecting some signs that the Bunnings captive sub-brand, Ozito, is being de-emphasised.
That's a smart move by Bunnings, because while Ozito and Ozito PXC might have attractive margins, it's a somewhat limited sub-brand as compared to Ryobi. That is in terms both of product range and product depth.
For example both Ryobi and Ozito PXC offer circular saws in the 150mm, 165mm and 184mm ranges, but Ryobi offers these in a "basic" model as well as its "HP" range. The latter provides a considerable performance boost, offering customers an easy path to upgrade, while retaining the same battery platform.
In terms of range, TTI has been hard at work with Ryobi over the years, adding tools that extend into craft and "upscaling" uses, as well as engaging with the Maker community (which often combines woodworking with electronics and 3D printing).
That said, there is a continuing question as to whether Bunnings is innovating its products at the same rate as eight or nine years ago. Adding brands isn't really a substitute for sourcing new and exciting products.