Underlying drivers remain solid
While the overall housing market is weakening, there remain several growth opportunities within specific categories with management constantly evolving the product and service offering to appeal to a wider range of customers.
Key drivers of home improvement and building material spend include the number and age of existing houses, new household formation and housing churn. There are 10 million existing homes in Australia with 70% over 20 years old. This is a driver of necessity spend and provides a core base for earnings. In addition, population growth is increasing the need for new housing which provides Bunnings with a growing customer base, while housing churn is also a driver given people often renovate immediately before selling, or soon after buying, a new home. These factors have underpinned Bunnings' earnings growth over the past few decades and we expect this to remain the case going forward.
Consumer preferences are changing
Social and demographic trends are impacting how consumers engage in the DIY market. For example, housing affordability is driving high density living and long-term renters. This is changing the way consumers think about storage with requirements for apartments different to detached houses. Millenials are also more digitally aware but generally have less DIY aptitude. Therefore, by providing education workshops and seminars Bunnings can help consumers complete their projects. Or, if they prefer to hire a tradesperson then Bunnings can also make that connection.
We think the focus on service makes Bunnings more than just a retailer and helps create stickier customers over the long term.
Expanding the product and service offer
Bunnings continues to invest in the product offer and has highlighted opportunities in categories it currently has low market share including Kitchens (<10% market share), Bathrooms (<10%), Window Furnishings (<10%) and Flooring (<5%). Range innovation and expansion (eg. Smart Products, Storage, Power Garden, Outdoor Living etc) remains a focus while the company is also investing in more services (eg. in-home design consultants, on-site project management, hire shop and do-it-for-me (DIFM) services).
Bunnings is also expanding its trade offering to gain a greater share of the trade market.
We make no changes to our earnings forecast or share price target (Morgans clients can login to view). We continue to view Wesfarmers (WES) as a core portfolio holding. While consumers remain cautious, we believe the strength of the balance sheet will allow WES to remain agile with capacity to invest in a fast-changing consumer environment.
We think the long-term prospects remain solid and retain our Add recommendation.
Morgans clients can login to view our detailed report and share price target for Wesfarmers (WES). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
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