Wesfarmers-Bunnings results FY2021/22 H1

Bunnings maintains revenue, sees earnings decline slightly

After a bumper first half for FY2020/21, concerns were that Bunnings would see a revenue decline. However, the retailer managed to perform better than expectations.

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    Australian conglomerate Wesfarmers has released results for its FY2021/22 first half, which include results for home improvement big-box retailer Bunnings. Wesfarmers recorded a near flat result in total revenue, at $17.76 billion, down by 0.1% on revenue for the previous corresponding period (pcp), which was the FY2020/21 first half. However, earnings before interest and taxation (EBIT) fell more significantly, to $1.91 billion, down from $2.14 billion in the pcp, a decline of -10.9%.

    Net profit after tax (NPAT) fell even further in percentage terms, coming in at $1.21 billion, down from $1.39 billion in the pcp, a decline of 12.7%.

    Bunnings offered a much better story, with a revenue increase of 1.7% over the pcp to $9029 million. However, earnings before tax (EBT) fell by 1.2% to $1259 million.

    The short-term retreat, however, masks a considerable step-change in revenue and earnings. Compared with the pre-pandemic first half of FY2019/20, Bunnings revenue for the reported half grew by 26.5%, and EBT grew by 34.2%.

    For Wesfarmers, the most significant decline came from the Kmart Group, which includes Kmart, Target Australia and the Catch online business, with EBT at a low of $178 million, down from $487 million in the pcp, a slide of -63.4%. Officeworks also did not do well, with EBT down from $100 million in the pcp to $82 million, a fall of -18%.

    Bunnings in detail

    In terms of the overall hardware and home improvement market, just how well did Bunnings do in revenue terms?

    If we take the raw, overall figures for Australian hardware revenue for the reported period as provided by the Australian Bureau of Statistics (ABS), actual growth in revenue over the pcp was 2.39%. This means that the Bunnings' increase of 1.7% in revenue would seem to be sub-par. In fact, looking at Chart 1, which shows the allocation of revenue across Australia's states and territories as detailed by the ABS, and Chart 2, which shows the distribution of Bunnings' store locations, it's reasonable to assume that Bunnings had more exposure in higher-growth states such as New South Wales (NSW) and Queensland (QLD) than it did to lower growth and negative growth states such as Victoria (VIC).

    If some rough assumptions are made, such as that the revenue generating capability of a smaller format store is 70% that of a warehouse on average, the growth exposure of Bunnings looks closer to a range of 2.7% to 2.9%.

    Yet growth for FY2020/21 H1 over the pre-COVID-19 FY2019/20 H1 at Bunnings did outpace the overall market. Growth in overall hardware revenue for Australia was 20.7%, while in top-line numbers Bunnings grew by 24.3%. If we apply those same calculations to Bunnings in terms of its growth according to store distribution, the growth opportunity was lower than for Australia overall, at around 16.5% to 18.0%.

    So the change that we've seen at Bunnings is sharp over-performance during the first phase of the COVID-19 pandemic, and mild under-performance during the second stage.

    We can only speculate about why that might have happened. Some candidates might be that Bunnings adapted quickly to the difficulties of the pandemic, outpacing other retailers by offering online purchasing, home delivery and click-and-collect services. Also, it could be that specific characteristics of the Omicron variant of COVID-19 might have disadvantaged Bunnings more than it did other retailers in late 2021. (That would include, for example, whether Bunnings enforced retail restrictions - such as denying entry to the unvaccinated - more vigorously than some of its competitors.)

    In his prepared remarks, the MD of Bunnings, Mike Schneider, detailed differences between the first and second quarters that made up the reported half:

    Government imposed lockdowns in Australia and New Zealand impacted quarter one trading and sales. Pleasingly, however, Bunnings was able to recover sales momentum in the second quarter, culminating in a strong Christmas, supported by a good stock position.
    Commercial sales growth remained strong for the half supported by robust housing construction and renovation activity and the execution of our strategy to better serve trades, builders and organisations. Online penetration rose to 4.3% driven by COVID-19 trading restrictions, particularly in Victoria, New South Wales and New Zealand.

    Looking at other performance numbers, these are very much inline with a general slowdown in growth. Store-on-store revenue grew by 1.5% (2021 H1: 27.7%), while total store sales growth was 1.0% (2021 H1: 24.8%). Return on capital (RoC) was, however, higher for the reported period at 79.0% (2021 H1: 76.6%). EBIT margin was slightly lower at 14.3% (2021 H1: 14.7%), but historically high. Chart 3 illustrates these numbers going back to 2013.

    As Mr Schneider commented:

    Overall, we were really pleased with our earnings performance given we were cycling such a strong first half last year, and the cost pressure that's been seen across the industry.

    Mr Schneider also pointed out that Bunnings continued, despite the difficulties of the pandemic, to grow and develop as a retailer:

    During the half the team continue to deliver on our long term strategic agenda. Despite the cost and stock pressures faced by the retail sector, we worked hard to maintain our everyday low prices and strong product availability for customers. We refreshed a number of our product categories with our updated garden care and storage ranges well received, and our new, easier to shop layout for power tools proving popular.
    We boosted in-store service by equipping our team with Push-to-Talk communications. That's allowing us to open additional checkouts quickly when traffic suddenly builds and quickly locate expert team [members] to assist our customers with specialist questions.

    Bunnings has also, according to Mr Schneider, continued to develop its digital capabilities. While the company reached a peak of over 4% of sales coming from online during the lockdowns, this later came down to around 2%.

    As part of our ongoing digital investment, we launched a new e-commerce platform for trade customers. The new mobile friendly website makes it easy for trade customers to shop our full range online, with their PowerPass pricing and arrange delivery to sites or collection at a store. We further improved search performance and personalisation on our new consumer web platform.
    We now have over 110,000 products SKUs available to purchase online. Digital engagement grew with the number of transactions made through Bunnings online store 41% higher than the first half of 2021.

    The three other developments of some note were the launch of FlyBuys, the launch of the first Tool Kit Depot (TKD) stores in Western Australia, and the finalisation of the purchase of Beaumont Tiles.

    In response to a question by analyst Shaun Cousins of UBS, Mr Scott outlined some of the advantages offered by FlyBuys:

    A big part of [launching FlyBuys at Bunnings and Officeworks] is, we have also reset the framework that the shareholder partners are working with Flybuys such that each of our businesses has greater rights around the use of data, which is highly complementary to all of our divisional strategies.
    We also believe - when you think about loyalty programs and data insight programs, from a customer point of view, having the capacity to earn more points and get more value across a broader range of categories really matters. And if you think about consumer-based retail loyalty programs, there is no other program in Australia that provides a broader reach and better value than Flybuys.
    So that's another good reason why our retail brands are keen to be a part of it. And then coming back to what's in it for our retailers, getting the benefit of capturing, you know, cost-effectively capturing customer transaction data in-store is a really key part of each of our divisions growth initiative.

    Mr Schneider followed up Mr Scott's comments by indicating the reception of the program had been positive, and that it fit well with the use of data analytics by Bunnings:

    I've got to say it's, it's something we're really excited about at Bunnings to be a part of, we're seeing really good participation from customers good engagement from our team in obviously reminding customers about scanning their Flybuys cards, but at the end of the day, what this comes down to for us is rapidly accelerating the amount of customer information we have, alongside the fact that the investments we've been making and talking about now for 18 months or so in terms of a data and analytics platform means that we've got the tools to use the information we have.
    I think had we sort of looked at this a couple of years ago, one, the construct probably wouldn't have worked for us, firstly, and then secondly, if we had the data, to be honest, we probably wouldn't have had anything really to, to do with it or meaningful nature.

    In terms of Tool Kit Depot, Bunnings has remained quiet about the development of this trade tool reseller. That partly has to do with the company's desire to develop it slowly through 2022, but also the only current stores are located in Western Australia, which remains somewhat isolated due to pandemic restrictions. The website (toolkitdepot.com.au) indicates the retailer will sell Makita, Milwaukee, Festool and AEG tools, as well a wide range of tool accessories.

    As for Beaumont Tiles, it seems likely that this will be developed slowly through 2022 as well. Mr Schneider had this to say about the acquisition:

    The acquisition of Beaumont Tiles was completed in November [2021], further improving Bunnings' ability to meet the specialist needs of builders and trades. The business remains separate and distinct with the initial focus on making it easy for Bunnings' commercial customers to access Beaumont Tiles' specialist design knowledge and extensive hard services range.

    One aspect of Beaumont's that is not widely understood is that in addition to its consumer tiles business, it has an entire range of tiles for builders, representing value on bulk orders, as well a well-established business in supplying tiles to large commercial installations.

    In response to a question by an analyst, Mr Schneider also described how he sees the market potentially developing through the rest of 2022:

    What we've seen is, look at that sort of 26 or so percent lift in revenue over sort of a two year period, the split of 65/35 [DIY/Trade], broadly remains the same. So what we see is, people being at home or doing more at home, wanting to maintain the projects that they've done, taking on all the new DIY skills that they've got, alongside the fact that access to trade for small jobs is really difficult.
    The pipeline and what we sort of have, you know, and what we can see in terms of pre-orders and things like that, gives us confidence, as I said in my comments before, about what the next period looks like in terms of not only housing starts, but also additions. But that percentage [trade/DIY] hasn't shifted materially at this point in time.


    The first thing that any analysis of these results for Bunnings needs to state is that the retailer really did "nail" the half. It's not perfect - what would be? - but it is very good. To effectively retain most of the market gains from the exceptional FY2020/21 was an unexpectedly good result.

    As HNN has said in the past, the real challenge for Bunnings as part of a listed company is to now convert those gains into further profitable expansions, so that when the market slides again, as it is likely to do in FY2022/23, revenue from expansion business will replace the peak revenue at Bunnings warehouses.

    It's unclear at this moment just how that will work out for TKD and Beaumont Tiles. Certainly the few images HNN has seen of the TKD stores look very good. At a guess, we're not going to see TKD stores launched on the east coast much before September 2022, if then. It's going to be a very competitive marketplace, with both Total Tools and Sydney Tools not only well-established, but simply very good retail operations in their own right.

    As for Beaumont Tiles, while Mr Schneider emphasised the advantages for trade and commercial Bunnings customers, it is evident this remains largely a play for the consumer market. HNN believes there is a strong possibility that a desire to compete with companies such as Reece was one motivator for the acquisition. While Beaumont's will remain an entirely separate and independent business from Bunnings, the case will be that its expertise will be used by Bunnings, which could see an evolution in the way sells, for example, bathroom fittings.


    Bunnings links to data through Flybuys – HNN Flash #74, December 2021
    Wesfarmers' move towards data analytics – HI News 4.5, July 2018
    HiLo and everyday low pricing (EDLP) pricing strategies at Bunnings – HI News 2.2, February 2016

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