Bunnings pushes Wesfarmers towards the next big thing

Wesfarmers' portfolio of brands largely performed well, as Bunnings hammered the competition while Coles' sales came in just below expectations. The group's focus will now shift to its next big strategic move.

Coles' third quarter food and liquor sales may have come in slightly below expectations, but the performance of Wesfarmers’ Bunnings hardware business was eyebrow-raising.

While Coles’ food and liquor sales grew 3.9 per cent -- 3.5 per cent on a comparable stores basis -- Bunnings lifted its sales by a staggering 12.3 per cent to just over $2 billion, with comparable stores growth of 7.8 per cent.

After a brief flattening of its performance as it prepared for Woolworths entry into the sector, Bunnings has regained both its sales and earnings momentum.

Double-digit sales growth in a less-than-buoyant retail environment and against the backdrop of the increasing presence and visibility of the Woolworths/Lowe’s joint venture is an impressive outcome.

Bunnings’ John Gillam is still in growth mode, opening four new warehouse stores in the quarter (15 for the year to date) and with another 16 under construction. It has been notable in Bunnings’ recent results that despite the accelerated rate of expansion of its network, its earnings growth has picked up, along with its already stellar returns on capital.

It will be easier to assess the performance of Coles’ business once Woolworths has produced its third quarter sales report.

There is an expectation among analysts that Woolworths will, for the first time since Coles’ resurgence began five years ago, report a stronger rate of sales growth than Coles as the myriad of tweaks Grant O’Brien has made to the business continue to show up in its improving performance.

It is, however, difficult for Coles to sustain the kind of growth rates it achieved when the business was being renovated. The easier gains have been made and Coles is cycling that strong growth from a year ago.

Assessments of the sales numbers are also complicated by the timing of Easter, which fell in the third quarter of last year, and by the restrictions on fuel discounts the two big supermarket chains “volunteered” to the Australian Competition and Consumer Commission late last year.

Coles’ performance is also affected by the continuing under-performance of its liquor business. Excluding liquor, its comparable stores food sales were up 3.9 per cent in the quarter and 4.3 per cent for the nine months.

Like Bunnings, Coles is expanding and fine-tuning its network, opening two big stores and closing four smaller stores during the quarter. During the nine months to March 31 it has opened 13 new Coles stores, closed six and rebranded 11 Bi-Lo stores as Coles. Coles has previously announced that it will open another 70 stores over the next three years.

There still significant upside within its existing network, with only 52 per cent of its stores converted to the group’s new formats. The success of the continuing upgrading of the network can be seen in improving sales per square metre, with Coles’ Ian McLeod saying the chain had produced record yields in the quarter.

Wesfarmers’ other two big retail brands, Kmart and Target, produced less impressive sales numbers, with Kmart edging its sales up 0.4 per cent in the quarter and Target’s sales shrinking by 4.8 per cent.

Adjusted for Easter, Kmart’s comparable stores sales growth was a more respectable 1.9 per cent. However, since managing director Guy Russo radically redesigned Kmart’s business model, Kmart’s progress has been far more evident in its strong earnings growth than in its sales growth, which has been modest.

Target is in the middle of a major and quite disruptive restructure, which includes a lowering of its pricing. Target’s Stuart Machin described sales in January and February as disappointing, but said trading in March had been more encouraging with the lower prices offset by transaction growth.

It will take some time before it is possible to assess the success or otherwise of the re-making of Target. It will also take time to answer the question of whether a portfolio of retail brands (like the Wesfarmers’ portfolio) with some over-lapping of offers can all perform strongly at the same time.

The strength of the overall portfolio, the supermarkets and Bunnings, however, does mean that Wesfarmers is now actively considering its next big strategic move since its $19bn acquisition of the Coles, Kmart and Target brands in 2007.