Wesfarmers runs the ruler over the costs of its Bunnings rollout

MICHAEL BENNET
May 03, 2013
The Australian

WESFARMERS has re-run the numbers on its Bunnings rollout amid concerns about the costs of new home-improvement stores, while revealing that it is becoming more comfortable about making acquisitions.
Chief financial officer Terry Bowen said yesterday the group remained confident that all of the 90 stores in its pipeline would deliver “good returns”, pointing out that the saturation point was constantly changing.

Broker Bank of America Merrill Lynch last week cut its earnings forecasts for rival Woolworths over concerns its new Masters hardware joint venture would lose more than $800 million over the next four years, partly due to high costs per store.

Mr Bowen said that while its Bunnings network was larger than would have been expected 10 years ago when big-box stores were typically 7000sq m, Wesfarmers was today opening stores as large as 17,000sq m because of innovation in the product range, often in areas previously not available for do-it-yourself, such as pool fencing.

“In terms of saturation, a lot of that is defined by innovative product categories,” he told a Macquarie conference in Sydney yesterday.

“As you keep redefining the market, I think it keeps redefining where saturation levels come to. Certainly, what we would say without being definitive is if we looked at the 90-odd stores we’ve got in our pipeline, the vast majority of those will fall into areas where Bunnings isn’t at the moment.

“We’ve re-run the numbers just in case to make sure that on a fairly conservative basis each of these stores will deliver good returns for us and we’re pretty confident that’s the case.”

As Wesfarmers continues to focus on its balance sheet and capital efficiency, Mr Bowen said it had the ability to “opportunistically move when something comes up that can create shareholder value”.

On Wednesday, Wesfarmers sold a 75 per cent stake in a portfolio of 19 Coles-owned shopping centres to fund manager ISPT, releasing $400m, which Mr Bowen said was part of a strategy to liberate capital.

Wesfarmers was criticised for paying too much in its $22 billion acquisition of Coles in 2007, and any acquisitions now will be closely scrutinised. There has been speculation Wesfarmers may be interested in Coates Hire, Australia’s largest equipment hire company.

“There are some areas we would rule out. I think we’ve famously said airlines was one of them,” Mr Bowen said.

“It’s fair to say there’s some areas where we would look at the group capability, where we can add value, bearing in mind that most acquisitions are going to require a control premium.
“As usual, though, we’re going to be pretty disciplined.”