Sales activity at Bunnings and Officeworks has been stunning over the period of pandemic-related restrictions but signals there is very little operating leverage for
-As restrictions lift, sales growth should taper
-Moderation in house prices, housing likely to impact sentiment
-Expansion of Bunnings online likely to be critical
Conditions during the coronavirus shutdown have actually favoured major
Credit Suisse was surprised at the strength of the update, although the resilience of home improvement-related sales (Bunnings) and working from home (Officeworks) was always apparent. Bunnings is likely to have outperformed the broader hardware segment over the period given, as the analyst plaintively describes, the "unending list of house maintenance requirements".
Still, the sales are treated as catching up rather than a pulling forward, amidst the support from household mobility restrictions and more free time. As these restrictions lift sales growth should taper.
Sales growth at Bunnings was 19.2% and Officeworks 27.8% over the year to date. Kmart and
Channel checks have also indicated to
All up,
Headwinds will grow in FY21 as government stimulus measures end. Moreover, Bunnings is exposed to a moderation in housing and there is a weak backdrop in this regard over the next 12 months.
Surplus funds also mean that acquisitions are a probability and this may provoke a negative market reaction initially, the broker adds. There is a need for
Underperformance of the portfolio has occurred in line with the sell-down of the interest in Coles ((COL)) and growing funding capacity. Moreover, Bunnings accounts for around 70% of the comparison portfolio value, ahead of its 65% contribution to group earnings.
Citi also considers
Costs
Sales growth has come at a cost. Citi points out the incremental margin on the latest sales is 14.5%, lower than what would normally be expected with such strong growth. The broker expects this situation will continue in the second half.
Costs were higher at Bunnings, as around
Costs at Officeworks are also expected to remain elevated in the second half. Similarly, the temporary closure of NZ stores will affect Kmart earnings in FY20. Momentum has improved at Kmart and
As a result of higher costs, Morgans remains cautious about how much of the improved sales will flow through to earnings. The broker may become more positive about the stock on any weakness in the share price.
Online
Online sales growth of 89% in 2020 to date is very positive, given the slower trajectory of online sales penetration the company has experienced in the past. It appears to Macquarie that
The broker expects online sales for
The company's three retail businesses are at very different stages of online development. Officeworks remains the strongest, particularly as it also manages a large shop-front channel. In contrast Kmart and
The recent expansion of Bunnings online will be critical, in Citi's view. This has started with click and collect and more recently the rolling out of delivery options.
FNArena's database has one Buy (Macquarie), four Hold and two Sell. The consensus
FNArena is proud about its track record and past achievements: Ten Years On
All material published by
© 2020 Acquisdata Pty Ltd., source