Are Bunnings’ glory days over?
The weekly pilgrimage to Bunnings for a browse and a snag-in-bread may be losing numbers fast, with Morgan Stanley analysts predicting the hardware retailer’s sales growth will halve this year as a result of cooling house prices.
Increasingly cautious consumers and growing pressure on household cashflow are likely to see spending on home improvement fall from the lofty highs seen during the peak of Australia’s capital city property price boom, according to Morgan Stanley stock analysts.
Parent company Wesfarmers, which also owns Coles, Kmart and Target, is set to release its first-half financial results on February 21 but attention could quickly fall to Bunnings due to its particularly high exposure to a “deteriorating housing market”.
“The housing market is cooling, particularly in NSW. Our macro team’s housing indicator suggests that price declines are set to continue over 2018,” analysts led by Thomas Kierath and Monique Rooney wrote in a report to clients.
“Also, our banks team thinks that higher mortgage rates and tighter lending standards have increased the risk of unintended consequences, including more pressure on household cash flows, weaker economic growth, higher non-housing loss rates, and lower house prices.”
And as homeowners tighten their budgets, spending on odd jobs around the house could be put on the back burner, leaving Bunnings to face weaker sales growth figures.
“We think Bunnings is affected in this environment and expect Bunnings [Australia and New Zealand like-for-like sales growth] to slow from 10.8 per cent in 1Q18 [the first quarter of fiscal 2018] to 5 per cent across 2H18 [the second-half of fiscal 2018].”
But not all in the market agree, with Charles Schwab Australia market analyst Ben Le Brun saying Bunnings remains “an absolute cash cow”, and that talk of cooling house prices have been around some time but have yet to noticeably damage the retailer.
“It’s a terrific business that may see some like-for-like sales depreciation, but we’re coming off a very high base and I don’t think there’s going to be anything to significantly derail the story,” Mr Le Brun told Domain, adding that he’d be surprised if Morgan Stanley’s prediction of halving sales growth proved accurate.
In growth terms, Bunnings is a “star performer” for the Wesfarmers conglomerate, according to Mr Le Brun, and the retailer is still benefiting from the closure of rival Masters in late 2016.
A decade of booming house prices, and strong management, have been good to Bunnings, with Morgan Stanley noting that in 2007 the business pulled in $528 million – a number predicted to be closer to $1.4 billion this year.
But while the Christmas trading period was solid for Bunnings, the analysts say any strength seen in the Australian and New Zealand arms will be offset by weakness in Bunnings’ struggling UK venture.
What are your thoughts? Do you think the glory days are over?
Written by Chris Kohler. Republished with permission of Domain.com.au.